5G traction likely to add to Tech Mahindra's order book, growth

Valuations at a 30% discount to peers are also at attractive levels

Tech Mahindra is best placed among Indian IT companies to gain from the rising adoption of 5G standard by consumers and companies. Ericsson in its 20th edition Mobility Report projected that global 5G mobile subscriptions will exceed 580 million by the end of 2021. Led by increased roll-outs in China, US and South Korea, subscribers are expected to rise by over eight times from 70 million subscribers at the end of the first quarter of this year.

Analysts at Prabhudas Lilladher believe that Tech Mahindra is well-positioned to capture a fair share of 5G network services spends.  While Infosys and TCS are aggressive in operating expenditure-related deals and have won several deals last year, Tech Mahindra is more penetrated and present in capital expenditure-related deals which are witnessing a pick up now, they add.

This should reflect positively on the company which gets 40 per cent of its revenues (rest is enterprise) from the telecom vertical. After the 6 per cent decline in the telecom vertical in FY21, analysts expect it to grow in high single digits in the current financial year. The management indicated that the contribution of 5G-related sales to telecom revenues as well as 5G orders to the overall order book have been improving in recent months.

In addition to this, overall order book at just over a billion dollars in Q4 has been the highest in the past five quarters and was split between telecom (Telefonica) and the enterprise segment. Deal momentum is expected to be strong in the June quarter as well.

Say analysts at Sharekhan, “We expect the company’s total deal values in Q1FY2022 to be around 1.5-2 times higher than average quarterly deal wins of $400 million-500 million, but it would be lower compared to Q4FY2021 ($1.04 billion).”  

Led by growth in the various segments such as technology and financials services and a recovery in the manufacturing vertical, the enterprise segment is expected to post double digit growth in FY22. Given the healthy deal pipeline, brokerages expect the company to report an overall revenue growth of 11 per cent this year.

Despite multiple headwinds on the costs front such as salary hikes, deal ramp ups and increase in travel spends going ahead, the company is confident of delivering margins of 15 per cent in FY22. After a 260 basis points margin expansion in FY21 to 14.2, the gains in the current year will be driven by offshoring, automation and higher operating leverage.

After nearly doubling in value in the first six months prior to January, the stock has been flattish since then. At the current price, the stock is trading at just under 16 times its FY23 earnings; this is at a discount of 30 per cent to peer valuations.

Suyog Kulkarni of Reliance Securities believes that the stock deserves multiple re-rating considering double digit net profit growth over FY21-23 driven by rebound in operating margin and strong topline growth on the back of an uptick in global 5G rollout and higher demand for enterprise technology. Given the strong cash flows expected going ahead, any increase in dividend or buyback programme would be an additional trigger. Investors can consider the stock on dips.