Recommendation From IT Consulting & Software Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Tech Mahindra Ltd. 

BSE Code: 532755
CMP: Rs 727.50
FV: Rs 5
BSE Volume: 251,824

RIDE THE TECHNOLOGY WAVE WITH TECH MAHINDRA 

HERE IS WHY Positive financial trend Robust order book Good growth prospects of the industry 

Tech Mahindra Ltd. is engaged in rendering services and solutions involving digital transformation, consulting and business re-engineering. It offers a plethora of services, such as IT outsourcing, consulting, next generation solutions, infrastructure management, integrated engineering solutions, business process outsourcing, platform solutions etc. 

On the consolidated quarterly front, the revenue from operations increased to Rs 8,629.85 crore in Q2FY19 from Rs 8,276.28 crore in Q1FY19, registering an increase of 4.27 per cent. Consequently, EBITDA rose to Rs 1,618.75 crore in Q2FY19 from Rs 1,356.90 crore in Q1FY19, thereby rising 19.29 per cent Consequently, profit after tax rose to Rs 1,064.33 crore in Q2FY19 from Rs 897.87 crore in Q1FY19, thereby increasing 18.53 per cent. Furthermore, cash flow from operations stood at USD 141 million in Q2FY19, representing 94 per cent of PAT, as compared to USD 109 million in Q1FY19. On the consolidated annual front, the revenue increased to Rs 30,772.93 crore in FY18 from Rs 29,140.84 crore in FY17, registering an increase of 5.60 per cent. Meanwhile, EBITDA rose to Rs 4,709.62 crore in FY18 from Rs 4,184.43 in FY17, posting a growth of 12.55 per cent. Profit after tax climbed to Rs 3,799.82 crore in FY18 from Rs 2,812.87 crore in FY17, thereby registering a growth of 35.08 per cent. The company’s net worth increased to Rs 18,842.8 crore in FY18 from Rs 16,437.2 crore in FY17, thereby rising 14.63 per cent. The return on capital employed climbed to 25.8 per cent in FY18 from 23.8 per cent in FY17. Meanwhile, the diluted EPS rose to Rs 42.7 in FY18 from Rs 31.6 in FY17. 

Currently, growth in the telecom sector is being driven by OSS/BSS spends by telecom operators. Presently, the company is running a few pilots in 5G in several countries. However, 5G would not only require a network upgrade, but also require an overhaul of systems, processes and techniques. Thus, the company continues to invest in big bets like 5G, blockchain and cyber security. The company’s operating profit margin has risen 710 bps over the last seven quarters. The management is optimistic about a further margin uptick, particularly on the back of factors like favourable business mix, synergies on account of portfolio companies and automation. The enterprise business grew 3.5 per cent, while the communications business grew 5 per cent QoQ in constant currency terms. Moreover, the management is confident in its ability to deliver around 10 per cent growth in the enterprise business in the upcoming quarters. In Q2FY19, Tech Mahindra signed new deals with TCV for an amount of USD 550 million, which is the highest reported deal in the last five years. Furthermore, it secured telecom deals worth USD 300 million, which proffer a further growth potential of over 20 per cent. The digital revenue share surged to 31 per cent in Q2FY19 from 28 per cent in Q1FY19, thereby rising 10 per cent QoQ. The operating margin increased by 250 bps as well. By virtue of these factors, we recommend our reader-investors to BUY this stock.