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JM Financial has a buy call on Tech Mahindra with a target price of Rs 920.
The current market price of Tech Mahindra is Rs 690.45.
Time period given by the brokerage is one year when Tech Mahindra price can reach the defined target.
Investment rationale by the brokerage:The 3-4-3 strategy has taken roots: TECHM is building its growth strategy across each vertical on 3 macro trends that are shaping that vertical; 4 technology bets that TECHM would make in addressing these trends; and CXO’s priorities among the 3 IT spend areas (Run + Change + Growth).
While the strategy was articulated six quarters back, it took 2-3 quarters to get infused in the organisation.
TECHM expects it should reflect in revenue growth accelerating over 2HFY19-FY20; both the deal wins and pipeline have improved YoY and are more aligned to the 3-4-3 strategy (share of change/growth spend-centric business is growing).
5G – warming up but revenue impact to come with a lag: TECHM is engaged in a few pilots currently underway in various countries.
It is also trying to showcase its technical competencies by setting up CoEs (centers of excellence); it announced one with Intel (in Sep-18) and Rakuten (in Oct-18).
TECHM is hopeful of a meaningful participation in the first phase of spend itself (software-defined networks) – LCC acquisition could be a major differentiator – and expect the 5G spend to come as a strong wave that could be difficult to predict.
Conservatively, it sees a visible revenue impact only in 2HFY20.
Margins remain in the focus: TECHM sees incremental gains from automation (currently <10 per cent projects are covered) and margin improvement in portfolio cos.
(currently at midway of the target margin range).
Also, while acquisitions remain a key component of TECHM’s growth strategy, management is now mindful of not diluting the margin unless there is a clearly defined path/timeline towards that.
TECHM is our key BUY in the sector: We believe TECHM is well placed to play the 5G story (see ‘The shape of things to come – 2: The 5G opportunity’ dated 29 October 2018) and while the 5G impact on reported financials will likely be visible only over FY20, newsflow/management comments could reflect on valuations ahead of earnings revisions, in our view.
Thus, we find the stock’s current valuations (13x FY20F EPS, 9 per cent discount to 5-year median) attractive.
Maintain BUY with Rs 920 price target (at 15x target PER).
