Moneycontrol Pro Panorama | Numbers add up as TechM gets into reboot mode

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Tech Mahindra (TechM) has been valued at a discount to the big four IT companies in the past due to inconsistent revenue growth and profit margins. But as the pandemic accelerated demand for IT services and customer spends in the communication vertical improve, TechM is making a comeback. Revenue in constant currency terms increased 7.2 percent sequentially in the previous quarter, the highest in recent years.

Acquisitions contributed around a percentage point to the September quarter growth rate. Even so, the growth rate compares favourably to the big four IT companies.

The growth is broad-based. The communications division, which generates 40 percent of TechM’s revenues, clocked an impressive revenue growth of 6.7 percent sequentially. Profit margins are stable despite cost pressures.

“Tech Mahindra has struggled in the past 5 years in balancing growth and margins, but we believe that it is getting its act together,” says Nirmal Bang Institutional Equities.

The company reported strong deal wins for the third consecutive quarter. Importantly, the September quarter results and management commentaries of TechM and other IT services companies indicate traction in the communication vertical. This augurs well for TechM, given its deep client relationships and strong presence in the business segment.

“TechM’s qualitative commentary continues to confirm the broad-based growth likely in the near term for the company as communications vertical sees initial spends around 5G transformation,” analysts at JM Financial Institutional Securities said in a note.

The performance and the commentary have triggered earnings upgrades by analysts. The valuation gap with larger peers is leading to a catch-up trade in the equity markets. The stock is one of the biggest gainers of the Nifty 50 in Tuesday afternoon trade. Read our analysis of the results. Our research team also analysed Tata Consumer Products’ results among others. Links are provided below, do check.

On the macro front, our Economic Recovery Tracker continues to show an upswing in the economy. People movement (mobility) is at healthy levels and monthly indicators such as bank credit growth have improved. However, semiconductor shortages, rising prices of commodities and energy prices remain key risks to the recovery.

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Ami Organics: What should investors do post recent correction?

Indian Energy Exchange: Coal crisis stokes stock run-up

Concor – On a solid footing

Colgate-Palmolive: Subdued show on growth as well as margin

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