Tech Mahindra Ltd Growth trajectory to sustain

We maintain our ‘Tactical Buy’ call on Tech Mahindra and raise TP to INR2,050 by Sushil Sharma
rolling over to FY24 earnings estimate (from TP of INR1,670 earlier, refer Research Analyst
September-2021 note). Our thesis of pick up in 5G deal momentum aid to already SushilK.Sharma@edelweissfin.com
strong growth momentum in the Enterprise segment driven by digitization along
with stable margins is playing out along expected lines. The company indicated
that ~20% of Communications business is now 5G based and is likely to increase
further. We estimate FY22E, FY23E and FY24E EPS to be INR62, INR73 and INR82,
CMP INR: 1,806
respectively. We maintain our ‘Tactical Buy’ call and raise target price to
INR2,050. Rating: Tactical BUY
Target Price: INR 2,050
Continued momentum in deal wins, strong traction across markets in Q3FY22 Upside: 14%
Tech Mahindra posted a sequential growth rate of 6.4% in USD terms and 7.2% in
CC terms in Q3FY22. Net new deal wins remained elevated at USD750mn for
Q3FY22 on the back of traction across key markets and verticals. Deal wins
remained elevated over the past three quarters (USD1050mn, USD815mn and
USD750mn in Q4FY21, Q1FY22 and Q2FY22, respectively), resulting in a cumulative Bloomberg: TECHM:IN
deal win of USD2.6bn in the past nine months versus USD1.7bn over Q4FY20–
Q3FY21. 52-week
915 / 1,823
range (INR):

Continued investment in building capabilities to ensure Tech Mahindra remains M cap (INR Cr): 1,75,298
ahead of the curve
Promoter
Tech Mahindra maintained its strategy to undertake M&A activities with the 35.50
Holding (%)
intention to acquire specific capabilities or capture identified opportunities. The
company closed three acquisitions in Q3FY22, strengthening its competence in
digital product engineering, customer experience solutions and e-commerce
capabilities.

Scale-up of Enterprise business likely to complement pickup in CME segment

Tech Mahindra targets to achieve USD1bn in annual revenue from its BFSI and
Manufacturing businesses, while adding substantial revenue from its Healthcare
and Hi-tech businesses. Excluding CME business, the company expects its
businesses to add USD1.5–2bn to its top-line, increasing at a 12–14% CAGR over
FY21–25 versus 9.7% over FY16–21.

Valuation and outlook

With robust demand driven by digital transformation in the Enterprise business and
uptick in 5G deals in the CME vertical, investment in building capabilities and strong
deal wins and pipeline, we expect Tech Mahindra to deliver 14% revenue and 17%
PAT CAGR over FY21–23E. The stock trades at 29x/24x/22x FY22E/FY23E/FY24E
earnings estimate and maintain our ‘Tactical Buy’ call and raise target price to
INR2,050.

(INR mn) FY21 FY22E FY23E

Revenue 3,78,551 4,32,612 4,88,224
Revenue Growth (%) 2.7% 14.3% 12.9%
EBITDA 68,470 82,192 1,00,107
EBITDA Margin (%) 18.10% 19% 21%
EPS 50 62 73
Diluted P/E (x) 36.0 29.0 24.0
EV/EBITDA (x) 22.9 19.0 15.6
RoE (%) 19.0 20.6 20.9
Date: December 29, 2021

Edelweiss Wealth Research 1

Tech Mahindra Ltd Investment Hypothesis

I. Continued momentum in deal wins, strong traction across markets in Q3FY22

Tech Mahindra posted a sequential growth rate of 6.4% in USD terms and 7.2% in CC terms in
Q3FY22. Net new deal wins remained elevated at USD750mn for the quarter on the back of traction
across key markets and verticals. Deal wins remained elevated over the past three quarters
(USD1050mn, USD815mn and USD750mn in Q4FY21, Q1FY22and Q2FY22, respectively), resulting
in a cumulative deal win of USD2.6bn in the past nine months versus USD1.7bn over Q4FY20–
Q3FY21.

Exhibit 2: Operating leverage helped sustain operating

Exhibit 1: Revenue up 6.4% QoQ and 16.4% YoY in Q3FY22 margin at 15%, negating lower utilisation and higher
subcontracting costs
1,500 1,473 20% 16,522 17%
17,000 16,037
15,370 15,453
1,384 15% 15,500
1,400 15%
1,353
(USDmn)

(INRmn)
1,330 14,000 13,313
1,309 10% 11,785
1,287 1,295
1,300 1,265 12,500 11,594 13%
1,247
5%
1,208 11,000 9,928
1,200 9,4969,173 11%
0% 9,500

8,000 9%
1,100 -5% Jun-19

Jun-20

Jun-21
Dec-19

Dec-20
Sep-19

Sep-20

Sep-21
Mar-20

Mar-21
Jun-19

Dec-19

Jun-20

Dec-20

Jun-21
Sep-19

Sep-20

Sep-21
Mar-20

Mar-21

EBIT (LHS) EBIT Margin (RHS)

Revenues (LHS) YoY (RHS)

Source: Company Data, Edelweiss Wealth Research

Exhibit 3: Communications segment witnessed 23% YoY Exhibit 4: Net new deal bookings worth USD3bn in LTM,
growth in deal wins in Q3FY22 with 2x growth in win rates
1,079 4,200 60%
1,100 275% 3,700
3,606 3,515
225% 3,500 3,063 40%
900 2,816 2,734
175% 2,800 2,443
2,209
(USDmn)

20%
700
125% 2,100 1,877 1,668
(USDmn)

518
0%
500 75% 1,400
352
255 25% 700 -20%
300 208
150 174 110
100 106 -25%
0 -40%
100
Jun-19

Dec-19

Jun-20

Dec-20

Jun-21
Sep-21
Sep-19

Sep-20
Mar-20

Mar-21

-75%
(100) Jun-19 Mar-20 Dec-20 Sep-21 -125%

Communications deal wins (LHS) YoY Growth Deal wins, LTM (LHS) Growth (%)

Source: Company Data, Edelweiss Wealth Research

Edelweiss Wealth Research 2

 Tech Mahindra Ltd Investment Hypothesis

II. Continued investment in building capabilities to ensure Tech Mahindra

remains ahead of the curve

Tech Mahindra maintained its strategy to undertake M&A activities with the intention to acquire
specific capabilities or capture identified opportunities. The company closed three acquisitions in
Q3FY22, strengthening its competence in digital product engineering, customer experience
solutions and e-commerce capabilities.

Exhibit 5: Acquisitions in Q3FY22

Date Acquired asset Competency area Value (USDmn)

Oct-21 Lodestone, The US Product and data quality assurance solutions 105
Oct-21 We Make Websites, The UK Shopify – focused e-commerce agency 13
Dec-21 Activus, The US Customer experience management solutions 62
Source: Company, Edelweiss Wealth Research

Exhibit 6: M&A strategy: acquire capabilities, gain access

Exhibit 7: Focus on business integration and unlocking value
and scale-up across business segments

Exhibit 8: Synergies driven by acquisition led to large deal

Exhibit 9: Substantial value created via inorganic means
wins and a robust pipeline in Q3FY22

Exhibit 10 Key investment themes of Tech Mahindra

Edelweiss Wealth Research 3

Tech Mahindra Ltd Investment Hypothesis

Scale up of Enterprise business likely to complement pickup in CME business

Tech Mahindra targets to achieve USD1bn in annual revenue from its BFSI and Manufacturing
businesses, while adding substantial revenue from its Healthcare and Hi-tech businesses. Excluding
CME business, the company expects its businesses to add ~USD1.5–2bn to its top-line, increasing at
a 12–14% CAGR over FY21–25 versus 9.7% over FY16–21.

Exhibit 11: Manufacturing and BFSI verticals set to surpass USD1bn annual revenue, with mid- to
high-teens growth registered in H1FY22, and likely to accelerate in H2FY22
1,000 40%

800 30%
20%
(USDmn)

600
10%
400
0%
200 -10%
- -20%
FY17 FY18 FY19 FY20 FY21 H1FY22

Manufacturing (LHS) BFSI (LHS) Mfg. Growth (RHS) BFSI Growth (RHS)

Exhibit 12: 3x growth in manufacturing pipeline through the past four quarters, forming 30% of
current pipeline

Exhibit 13: BFSI business expanded at a 16% CAGR over the past five years, with 1/3rd of Tech
Mahindra’s top 10 clients from the BFSI space

Source: Company Data, Edelweiss Wealth Research

Edelweiss Wealth Research 4

 Tech Mahindra Ltd Outlook and Valuation

With robust demand driven by digital transformation in the Enterprise business and uptick in 5G
deals in the CME vertical, investment in building capabilities and strong deal wins and pipeline, we
expect Tech Mahindra to deliver 14% revenue and 17% PAT CAGR over FY21–23E. The stock trades
at 29x/24x/22x FY22E/FY23E/FY24E earnings estimate and maintain our ‘Tactical Buy’ call and raise
target price to INR2,050.

Exhibit 14: Tech Mahindra 1-year forward P/E multiple likely to sustain as valuations track
revenue growth

26
20%
23
15%
20

17 10%

14
5%
11

8 0%
01-04-2015

01-04-2017
01-04-2014
01-08-2014
01-12-2014

01-08-2015
01-12-2015
01-04-2016
01-08-2016
01-12-2016

01-08-2017
01-12-2017
01-04-2018
01-08-2018
01-12-2018
01-04-2019
01-08-2019
01-12-2019
01-04-2020
01-08-2020
01-12-2020
01-04-2021
01-08-2021
01-12-2021
Mcap/PAT (LHS) -2 SD -1 SD
Mean 1 SD 2 SD
Revenue Growth (RHS)

Source: Company, Edelweiss Wealth Research

Exhibit 15: Tech Mahindra reasonably valued across large cap and midcap IT universe
Mcap Revenue (INRmn) EBIT Margins EPS P/E ROCE ROE
CMP
(INRmn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
TCS 3,671 1,35,78,840 16,41,770 18,69,050 21,25,927 26% 26% 27% 91 107 125 40 34 29 12% 13% 14% 40% 43% 44%
Infosys 1,864 78,38,000 10,04,730 11,94,628 14,07,169 25% 25% 25% 46 54 65 41 34 29 9% 10% 12% 27% 31% 34%
HCL Tech 1,265 34,33,000 7,53,790 8,68,094 9,73,678 21% 20% 21% 46 51 61 28 25 21 27% 27% 32% 22% 22% 26%
Wipro 698 38,16,000 6,19,430 7,92,133 9,07,928 19% 19% 19% 20 25 28 36 28 25 21% 26% 24% 20% 24% 24%
Tech M 1,724 16,72,000 3,78,551 4,32,612 4,88,224 14% 15% 17% 50 62 73 34 29 24 24% 27% 2% 19% 21% 21%
LTI 7,166 12,56,000 1,23,698 1,54,934 1,85,225 19% 19% 22% 110 141 186 65 51 39 41% 42% 48% 31% 32% 36%
Mindtree 4,621 7,61,821 79,678 1,03,522 1,25,975 17% 18% 19% 67 93 115 69 50 40 41% 43% 44% 30% 32% 33%
Coforge 5,646 3,43,748 46,628 64,163 79,966 14% 15% 19% 79 118 184 72 48 31 26% 34% 42% 19% 25% 32%
LTTS 5,343 5,63,593 54,497 66,884 82,465 15% 19% 22% 65 98 141 82 55 38 29% 37% 44% 22% 28% 33%
Persistent Systems
5,501 3,42,617 41,879 56,022 73,991 12% 14% 16% 59 89 129 93 62 43 23% 31% 37% 18% 23% 28%
Birlasoft 531 1,47,704 35,557 41,872 51,831 13% 14% 15% 11 17 23 47 31 24 20% 26% 29% 16% 21% 24%
Cyient 991 1,09,155 41,325 46,335 53,118 10% 13% 13% 33 45 54 30 22 18 15% 19% 20% 14% 16% 17%
eClerx 2,359 79,793 15,645 20,605 22,966 23% 24% 23% 81 109 118 29 22 20 25% 29% 29% 19% 23% 21%
Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 5

Tech Mahindra Ltd Financials

Income Statement (INR mn)

Year to March FY21A FY22E FY23E
Total operating income 3,78,551 4,32,612 4,88,224
Gross profit 1,19,996 1,39,958 1,64,553
Employee costs 0 0 0
Other expenses 0 0 0
EBITDA 68,470 82,192 1,00,107
Depreciation 15,084 15,170 18,064
Less: Interest expense 1,740 3,079 4,688
Add: Other income 7,871 9,699 7,810
Profit before tax 59,517 73,641 85,165
Prov for tax 15,999 19,208 21,291
Less: Other adjustment 0 0 0
Reported profit 44,268 55,183 64,623
Less: Excp.item (net) 0 0 0
Adjusted profit 44,268 55,183 64,623
Diluted shares o/s 880 885 886
Adjusted diluted EPS 50 62 73
DPS (INR) 17 17 17
Tax rate (%) 26.9 26.1 25.0

Important Ratios (%)

Year to March FY20A FY21 FY22E
Cost of revenues (%) 68.3 67.6 66.3
SG&A expenses (%) 13.6 13.4 13.2
Depreciation (%) 4.0 3.5 3.7
EBITDA margin (%) 18.1 19 20.5
Net profit margin (%) 11.7 12.8 13.2
Revenue Growth (% YoY) 2.7 14.3 12.9
EBITDA growth (% YoY) 19.6 20 21.8
Adj. profit growth (%) 9.6 24.7 17.1

Valuation Metrics
Year to March FY20A FY21 FY22E
Diluted P/E (x) 36 29 24
Price/BV (x) 6.4 5.6 4.8
EV/EBITDA (x) 22.9 19 15.6
Dividend yield (%) 1.1 1.1 1.1

Edelweiss Wealth Research 6

Tech Mahindra Ltd Financials

Balance Sheet (INR mn)

Year to March FY21A FY22E FY23E
Share capital 4,370 4,370 4,370
Reserves 2,44,280 2,81,795 3,28,733
Shareholders funds 2,48,650 2,86,165 3,33,103
Minority interest 3,795 3,045 2,295
Borrowings 16,618 15,288 14,124
Trade payables 27,850 32,072 35,471
Other liabs & prov 59,965 65,962 72,558
Total liabilities 3,96,780 4,45,193 5,03,248
Net block 24,632 16,645 6,000
Intangible assets 64,662 66,937 69,212
Capital WIP 1,183 1,420 1,704
Total fixed assets 90,477 85,001 76,916
Non current inv 891 891 891
Cash/cash equivalent 1,23,523 1,72,298 2,37,752
Sundry debtors 64,728 80,596 90,957
Loans & advances 0 0 0
Other assets 1,17,161 1,06,407 96,732
Total assets 3,96,780 4,45,193 5,03,248

Free Cash Flow (INR mn)

Year to March FY21A FY22E FY23E
Reported profit 44,268 55,183 64,623
Add: Depreciation 15,084 15,170 18,064
Interest (net of tax) -45,034 -77,231 -1,12,512
Others 50,985 69,861 1,08,640
Less: Changes in WC 15,635 7,864 12,345
Operating cash flow 80,938 70,848 91,161
Less: Capex -17,065 -9,695 -9,979
Free cash flow 63,873 61,153 81,182

Valuation Drivers
Year to March FY21A FY22E FY23E
EPS growth (%) 10.1 24 17
RoE (%) 19.0 20.6 20.9
EBITDA growth (%) 19.6 20 21.8
Payout ratio (%) 33.9 27.4 23.4

Edelweiss Wealth Research 7

 Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar
Head Research
VINAY Digitally signed by
VINAY KHATTAR

vinay.khattar@edelweissfin.com KHATTAR Date: 2021.12.29

13:57:35 +05'30'

400
350
300
(Indexed)

250
200
150
100
50
0
Nov-18

Nov-19

Nov-20

Nov-21
Jul-18

Jul-19

Jul-20

Jul-21
Sep-18

Sep-19

Sep-20

Sep-21
Mar-18
May-18

Mar-19
May-19

Mar-20
May-20

Mar-21
May-21
Jan-18

Jan-19

Jan-20

Jan-21
Tech Mahindra Sensex

Edelweiss Wealth Research 8

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Edelweiss Wealth Research 9

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Financial Markets, Asset Management and Life Insurance. There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and
material disciplinary action during the last three years. This research report has been prepared and distributed by Edelweiss Broking Limited ("Edelweiss") in the capacity of a Research
Analyst as per Regulation 22(1) of SEBI (Research Analysts) Regulations 2014 having SEBI Registration No.INH000000172.

Edelweiss Wealth Research 10