Tech Mahindra enters the big league

Expects to end FY15 with $5 bn in revenues as deal wins continue

The information technology sector continues to hold investors’ attention. Tech Mahindra has emerged as a top pick, thanks to the strong revenue momentum and deal wins. The March quarter saw the end of amortisation of revenues from BT, a top client. Despite this, the company's revenue growth momentum has been maintained. Tech Mahindra ended FY14 with a year-on-year (y-o-y) sales growth of 17.6 per cent, the highest in the sector. Analysts expect the company, which is currently the fifth largest software exporter, to report a revenue growth of 18 per cent in FY15.

Deutsche Bank Markets Research has raised its FY16 and FY17 earnings estimates for Tech Mahindra by 3.5 per cent each and reiterate the stock as one of its top 'Buys' with a target price of Rs 3,000 (vs Rs 2,300 earlier).

Even though 50 per cent of the company's revenues come from the telecom vertical, its revenue trajectory has not taken a hit. The company has leveraged its relationships and domain knowledge to engage better with clients. According to Atul Goyal of Jefferies, over the past eight quarters, telecom has actually led growth for the company, with a 5.9 per cent compounded quarterly growth rate vs 4.2 per cent for the overall company. However, revenue concentration of 50 per cent in one vertical is also perceived as a risk, in case the sector faces problems.

Besides, the company continues to win strong deals. Over the last four quarters, analysts claim, Tech Mahindra has signed deals with a total contract value of $1.2 billion. From signing deals in the $50-75 million band, the company is now moving up the chain, thanks to better client mining. Deutsche Bank Markets Research says, "Rise in customer satisfaction and share gains is reflected in the strong deal signings announced by the company in recent quarters. Based on channel checks, we expect this band to move to $100m+ from 2HFY15."

Interestingly, the company has a far more ambitious revenue target for FY15 than the market. Analysts claim the company is targeting $5 billion in revenues by end-FY15. One way the company could achieve this could be through acquisitions, given that the company is sitting on $609 million in cash.

The outlook on margins too looks promising. For the last three quarters, the company's margins have declined from 20.7 per cent to 15.2 per cent in June 2014. Given that utilisation levels are low compared to other big companies like TCS and HCL Tech, there are enough levers to expand margins, believe analysts, in the coming quarters.