Recommendation from Computers - Software Sector
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 : FROM REPAIR TO RALLY
HERE IS WHY
β Improved profitability
β High free cash flows for the firm
β Rising demand for its services
Marking its place in the top 15 IT service providers in the world, Tech Mahindra Ltd. of the Mahindra Group has become one of the fastest growing brands enabling end-to-end digital solutions for global customers. It is focused on leveraging next-generation technologies including 5G, blockchain, cyber security, artificial intelligence and digital transformation. In 2009, it acquired a controlling stake in Satyam Computers and was named Mahindra Satyam. Finally, in 2013, the merger concluded and the company was renamed Tech Mahindra Ltd. The company reported net sales of Rs 37,855.1 crore in FY21 compared to Rs 36,867.7 crore in FY20. That is a flat growth of nearly 2.7 per cent.
A large part of revenue growth was attributed to accelerated digitalisation of the marketplace and a shift to cloud. The 5G business witnessed growth as the company bagged a huge deal win in the segment with a European customer. The EBIDTA stood at Rs 7,583.4 crore in FY21 as against Rs 6,701 crore in the previous year. That is a growth of over 13.2 per cent. The EBIDTA margins have seen a rise of 260 bps on the backs of robust operational performance. Also, PAT saw a growth of 11.5 per cent with an increase from Rs 3,902.9 crore to Rs 4,351.8 crore from FY20 to FY21, respectively. The company’s focus on cost transformation greatly boosted profitability for FY21.
A solid jump of nearly 85.7 per cent can be seen in the cash flows from operating activities increasing from Rs 4,358.1 crore in FY20 to Rs 8,093.8 crore in FY21. It generated the highest-ever free cash flows of Rs 7,169.2 crore. The YoY quarterly results have seen double-digit growth in every key parameter. As far as the June quarterly results are concerned, net sales stood at Rs 10,197.6 crore, up by 4.81 per cent QoQ. The Q1 FY22 total contract value stood over Rs 6,000 crore owing to several large deal wins in the quarter. EBITDA, exclusive of other income, stands at Rs 1,876.4 crore, slightly down by 1.1 per cent QoQ basis.
Seasonally, the first quarter is the weakest for the company mainly due to wage hikes, visa costs and seasonal decline in mobility business. The margins are expected to improve in the next few quarters. The quarterly net profit increased substantially to Rs 1,365.9 crore by 30.8 per cent sequentially. On a standalone basis, the communications vertical contributed the most (39.7 per cent) to the revenues, followed by manufacturing (16.4 per cent) and technology, media and entertainment (16.2 per cent). For the year FY21 almost all the verticals delivered appreciable performance. The company had been focused on improving its cash flow management and improving the margins through costcutting and process redesigning.
The company has been maintaining a good track record in terms of returns to stakeholders. Along with the highestever dividend paid to shareholders which yielded 1.09 per cent, the ROE stood at 19.01 per cent while the ROCE stood at 22.98 per cent. The company is almost debt-free. Its PE multiple of 27.8 is relatively cheaper than the industry PE of 38.38. The IT sector has seen a boom post the pandemic times. That is because the pandemic has made every enterprise realise the need for digitalisation. To quote the management, Tech Mahindra, which had been in the repair phase before, has changed the gear to rally phase. By virtue of all these factors, we recommend investors to BUY the scrip.
