5G traction likely to add to Techm’s order book
Trading at a 30% discount to peers, valuation is also at attractive levels
Tech Mahindra (Techm) is best placed among Indian information technology (IT) companies to gain from the rising adoption of 5G standard by consumers and companies globally.
Ericsson in its 20th edition of the mobility report projected global 5G mobile subscriptions to exceed 580 million by the end of 2021. Led by increased roll-outs in China, the US, and South Korea, subscribers are expected to rise eightfold, from 70 million at the end of the first quarter of this year.
Analysts at Prabhudas Lilladher believe that Techm is well-positioned to capture a fair share of the 5G network services spends.
While Infosys and Tata Consultancy Services are aggressive in operating expenditure-related deals and have won several deals last year, Techm is more penetrated and present in capital expenditure-related deals witnessing a pick-up, they add.
This should reflect positively on the company which gets 40 per cent of its revenue (rest is enterprise) from the telecommunications (telecom) vertical.
After a 6 per cent decline in the telecom vertical in 2020-21 (FY21), analysts expect it to grow in high single digits in the current financial year. The management indicated that the contribution of 5G-related sales to telecom revenue, as well as 5G orders to the overall order book, has been improving in recent months.
In addition, the overall order book at just over a billion dollars in the fourth quarter (Q4) has been the highest in the past five quarters and was split between telecom (Telefonica) and the enterprise segment.
The deal momentum is expected to be strong in the June quarter as well.
Say analysts at Sharekhan, “We expect the company’s total deal values in the first quarter of 2021-22 (FY22) to be around 1.52x higher than the average quarterly deal wins of $400-500 million, but it will be lower compared to Q4FY21 ($1.04 billion).”
Led by growth in segments such as IT and financials services and a recovery in the manufacturing vertical, the enterprise segment is expected to post double-digit growth in FY22. Given the healthy deal pipeline, brokerages expect the company to report an overall revenue growth of 11 per cent this year.
Despite multiple headwinds on the cost front, such as salary hikes, deal ramp-ups, and increase in travel spends going ahead, the company is confident of delivering margins of 15 per cent in FY22.
After a 260-basis point margin expansion in FY21 to 14.2 per cent, gains this year will be driven by offshoring, automation, and higher operating leverage.
After nearly doubling in value in the first six months prior to January, the stock has been flat since. At the current price, the stock is trading at just under 16x its 2022-23 (FY23) earnings; this is at a discount of 30 per cent to peer valuations.
Suyog Kulkarni of Reliance Securities believes that the stock deserves multiple rerating, considering the double-digit net profit growth over FY21-23 driven by rebound in operating margin and strong top-line growth on the back of an uptick in global 5G roll-out and higher demand for enterprise technology.
Given the strong cash flows expected, any increase in dividend or buyback programme would be an additional trigger. Investors can consider the stock on dips.