Tech Mahindra's deal wins of over $1.3 bn keeping Street sentiment positive

Valuation of over 13 times its FY21 estimated earnings reasonable

Tech Mahindra delivered a better-than-expected performance in the December quarter, led by traction in its largest vertical — telecommunications. The company reported 5.1 per cent growth in revenues at $1.3 billion. 

Growth was largely driven by revenues from the recent order win from AT&T, which helped the telecom vertical post 9 per cent growth. Telecom accounts for about 43 per cent of the company’s revenues. 

The firm indicated that growth in the manufacturing vertical (second-largest) has stabilised, while in the financial services space, it has started gaining some traction.

For the second quarter in a row, the firm reported deal wins of over $1.3 billion. While the September quarter wins were led by AT&T, the firm won a $900 million deal in the financial services space. 

Though the company indicated that deal pipelines remain healthy, analysts believe similar deal wins (in terms of deal size) — especially in the telecom vertical — may not go through.

 

 

Given the deal wins, analysts believe that the company will be able to post healthy growth rates over the next couple of quarters. 

For the company to achieve double-digit growth (estimates at 11 per cent dollar revenue growth) in FY21, the pace of 5G launches, as well as growth in the non-telecom verticals, will be important.

On the margins front, the company reported a 30-basis-point dip to 16.2 per cent on a sequential basis, broadly in line with analyst estimates. 

While a record utilisation rate and favourable currency helped, the lower margins were on account of transition costs related to the AT&T deal and uptick in sales, general and administration expenses, as compared to the low base in the September quarter. 

Though the company is looking to keep utilisation levels high through automation and improved delivery mechanisms, margins could come in muted, especially in the current quarter (March), given the transition costs from the large deal wins over the last two quarters.

Going ahead, the Street will keep an eye out for deal wins and margin trajectory. Valuations at just over 13x its FY21 earnings estimates are reasonable.