Buy This Large Cap IT Stock For 39% Upside Says Edelweiss Broking

Edelweiss Broking Ltd has issued a buy rating on Tech Mahindra Ltd's stock, with a target price of Rs 2,050. The brokerage estimates a potential upside of 39.93 percent from the current market price of Rs 1,465.10 as of 3 February, 10:23 am IST. Tech Mahindra Ltd is a large-cap IT company with a market capitalization of Rs 143,933.64 crore.

Q3FY22 result update according to the brokerage

Edelweiss has said that the company's revenue from the CME segment grew 6.2%/6.9% QoQ USD/CC. This is the second consecutive quarter of higher than 6% sequential growth as demand continues to remain robust. New deal wins in the CME segment came in at USD 226 mn vs USD 255 mn in Q2FY22 as the company focuses on quality of deals over volume. The management is positioning its 5G strategy around system integration, design and digital cloud aspect of 5G, over just network deployment.

According to the brokerage "Enterprise segment posted tepid growth of ~2% QoQ in USD in organic terms and 2.7% QoQ in USD on a consolidated basis. The underperformance was on account of weak growth in BFSI and Hi-Tech verticals. This underperformance was attributed to seasonality and some projects coming to an end. Demand across the two verticals remains robust and are expected to normalise in the subsequent quarters. EBIT margins degrew 40 bps QoQ on account of supply-side challenges, low utilization and higher subcon costs. While attrition remains elevated, strong topline growth, higher offshoring, improved pyramid, increase in utilization and lower reliance on subcontractors will act as margin tailwinds going forward."

Investment rationale according to the brokerage

Edelweiss Broking has said in a report that "In light of significant supply-side challenges, Tech Mahindra has focused on improving its pyramid in order to lower its cost. The company plans to add ~10,000 freshers in FY22 and will hire more in FY23. It has invested in creating capacities in 9 tier 2 cities where it has hired ~8,000 employees at ~15% lower cost than tire 1 cities. Also, in addition to its existing near shore capacities in Canada and Mexico, it has invested in creating near shore capabilities in new geographies such as Latvia, Romania, Costa Rica and Belarus which are expected to lower its subcon costs going forward."

Buy With A Target Price of Rs 2,050

The brokerage has claimed that "TechM has delivered stable quarter with revenue outperformance led by CME segment. Demand-driven by digital transformation in the Enterprise business and uptick in 5G deals in the CME segment remained elevated as indicated by strong new deal wins. We expect Tech Mahindra to deliver 14% revenue and 17% PAT CAGR over FY21-23E and maintain a 'BUY rating on the stock with a TP of INR 2,050. AT CMP the stock trades at 20x FY23E EPS."

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Broking Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.