Tech Mahindra to gain from 5G roll-out

Non-telecom revenues are also expected to improve

The Tech Mahindra (TechM) stock has been one of the biggest gainers among largecap information technology (IT) service companies, up 72 per cent over the past year. With the telecom vertical (43 per cent of its revenues) expected to do well, given the slew of 5G launches by operators globally, the Street believes the company is well placed to sustain the gains.

Since software service providers have to deliver solutions well in advance of launch of telecom operations, expect these gains to soon reflect in TechM’s numbers. Analysts at Goldman Sachs say the company is prepared with the right set of investments and capabilities to leverage on 5G capex spending by global operators. Consequently, its telecom vertical is estimate to post annual revenue growth of 11 per cent. Its operating profit is expected to improve 24 per cent annually over FY18-

21. The foreign brokerage believes the stock offers the best risk-reward ratio in the Indian IT sector and expects a 40 per cent upside, compared to 12 per cent for the sector.

The telecom vertical was primarily responsible for the company’s soft revenue growth (adjusted for acquisition) in the past two to three years. The segment’s revenue fell one per cent in FY18, mainly due to restructuring of the business and pricing changes in large telecom clients. Consequently, the stock underperformed the broader market in FY16, FY17 and the early part of FY18.

But, with the business environment on the mend, for both the company and sector, the stock gains are there to see. Analysts at JM Financial expect the telecom vertical to grow five per cent in FY19. They expect incremental upside from a pickup in the 5G capex cycle, with TechM participating much ahead of competition and on a wider footprint than the previous cycle due to downstream expansion (LCC acquisition), coupled with larger than expected deployment of softwaredefined networks in 5G roll-outs.

What has also helped the company, unlike its peers, has been a relatively lower exposure to retail and financial verticals, growing at a much slower pace. Analysts expect the enterprise vertical, accounting for 57 per cent of revenue, to grow ahead of the industry average, due to lower drag of legacy services and cross- selling opportunities.