Stock To Buy: This IT Major Is Top Pick By Axis Securities, Suggests Buy For 20% Potential Upside

Axis Securities has given a "buy" rating to Tech Mahindra Ltd.'s stock with a target price of Rs 1,200 per share in its October 2022 top picks research report. Given the estimated target price and the stock's current market price, there is a significant 20% upside potential in the next 12 months.

Tech Mahindra is India's leading IT services provider to many business conglomerates. Tech Mahindra is headquartered in Mumbai (India) and has a strong presence across geographies such as North America, Europe, the Middle East, Australia, etc. The company provides specialized IT services to its clients across verticals like Communications, Healthcare, and BFSI, among others.

Stock Outlook & Returns

Tech Mahindra's current market price (CMP) stood at Rs 1,004.85 per share on NSE after a fall of 2.48% from its previous close. Its 52-week high level is Rs. 1838 and its 52-week low is Rs 943.70, respectively. It is a large-cap IT sector stock company having a market cap of Rs 97,727.84 crore as on 11 October 2022.

 
The company's annual revenue growth of 18.42% outperformed its 3-year CAGR of 8.96%. In terms of return, the stock has performed well over the 5 years and gave a multibagger return of 115.06%. However, over a year, the stock has fallen 28.24%, 10.81% in 1 month and 2.28% in the past 1 week, respectively. 

Strong Q1FY23 performance

Tech Mahindra Ltd (Tech M) reported better-than-expected results in Q1FY23. The company's revenue for the quarter stood at Rs 12,708 Cr, delivering a growth of 4.9% QoQ. However, despite the revenue growth, the company's operating margins declined 220bps to 11%, primarily owing to higher operating costs and employee wage hikes which were only partially offset by cross-currency tailwinds. The company's net income for the quarter stood at Rs 1,132 Cr, down 16% YoY and 25.7% QoQ. On a brighter note, the ramp-up in new deal wins enabled Tech Mahindra to generate strong volume growth. The Communication vertical grew 6.7% QoQ while the Enterprise vertical showcased a growth of 6.3% QoQ in CC terms.

Strong deal wins and pipeline reflects demand acceleration

The deal pipeline, too, remained robust during the quarter at TCV of $805 Mn, which is broad, based. The management is expecting strong improvements in supply-side constraints and expects recovery with the ramp-up in new deal wins. Moreover, the deal pipeline is trending at an all-time high led by (a) Advanced stage discussions within the network and core transformation within Communications and (b) Data and Digital within Enterprise. This reflects demand acceleration. 

 

Posted robust broad-based growth

On the vertical front, BFSI de-grew by 2.9% QoQ and Manufacturing improved by 3.9% QoQ. Technology improved by 6.4% QoQ. Furthermore, Retail Transport & Logistics reported a growth of 5.5% QoQ while Others grew at 0.2% QoQ. 

On the geographical front, North America (48% of revenue) grew by 4.4% QoQ, Europe (26% of revenue) de-grew by 1.9% QoQ and the Rest of the World (25% of revenue) de-grew by 0.4% QoQ (in CC terms). All Services witnessed robust demand and the momentum is expected to continue in the forthcoming quarters 

On the services line front, CME delivered a strong recovery at 4.1% growth on a QoQ basis. Enterprise services grew by 5.4% QoQ, IT services by 4.7% QoQ, and BPS by 9.7% QoQ. All Services witnessed robust demand and the momentum is expected to continue in the forthcoming quarters. 

Initial traction in 5G; may pick up in FY23-FY24

The management sees initial traction in 5G both on (a) Communications side where traction is visible in modernization IT, network, process and systems, and (b) Enterprise side where it signed 3 Manufacturing 5G solutions in Europe and 1 in the US. While the timing of pickup is difficult to predict, the management expects 5G growth to pick up in FY22 or at most in FY23and FY24. "We expect initial traction and pipeline build-up to aid network and core modernization for 5G within Communications in FY22. We see 5G for Enterprise as a long-term opportunity and expect it to pick up in FY23 and beyond," the brokerage said. 

Strengthening capabilities

Tech Mahindra has done tuck in acquisition to strengthen the capabilities which are Cloud-focused asset having expertise in Cloud Consulting, Enablement, Application Development, and Data Analytics. The acquisition will bolster Tech M's consulting capabilities in the Cloud transformation space and will enable Tech Mahindra to drive the growth of Cloud-related IT services in the North American market.

Valuation

"We believe Tech Mahindra has a superior services mix and multiple long-term contracts that are well-spread across the verticals, reducing its dependency on any one vertical. Furthermore, we foresee healthy tractions in Communications and Enterprise verticals which will greatly accelerate the company's revenue growth moving forward. We recommend a BUY rating on the stock and assign a 14x P/E multiple to the company's FY24E earnings of Rs 83.7/share to arrive at a Target Price (TP) of Rs 1,200/share. TP implies an upside of 14% from CMP," Axis Securities said. 

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.