Tech Mahindra hits new high on healthy growth outlook, 5G opportunities

The company is expecting acceleration in growth based on large deal pipeline, acceleration in digital technologies and 5G opportunities

Shares of Tech Mahindra hit a new high of Rs 909, up 4 per cent, on the BSE on Tuesday on expectation that growth could accelerated going forward based on large deal pipeline and 5G opportunities. The stock surpassed its previous high of Rs 890, touched on November 24, 2020.

In the virtual analyst meet, Tech Mahindra highlighted that it is expecting an acceleration in growth based on large deal pipeline (73 large deal potential), healthy pipeline (20 per cent pipeline growth in six months), acceleration in digital technologies and 5G opportunities.

The management believes there is a large multi-billion dollar opportunity in 5G network services (christened Network Services 3.0), and expects the segment to grow at a faster pace than the overall Communications vertical.

"The company is also aiming to reduce revenue volatility by focusing on more annuity type deals. The company expects lower than double digit growth in telecom (around 40 per cent revenues) and higher double digit in enterprise segment (60 per cent of revenues) in FY22. In terms of margins, the company expects to reach 15 per cent by FY22E led by higher offshoring, lower subcontracting cost, reducing focus on low margin geographies, services & customers and pyramid rationalization," ICICI Securities said in a note.

The brokerage firm said it remains positive on the company as it is well poised to capture improving IT spend in communication and digital traction on the enterprise side. Further, in the long term, it believes Tech Mahindra will be a key beneficiary of 5G opportunities. This, coupled with improving margin trajectory and reasonable valuation, bodes well for the company, it said.

On the flipside, Motilal Oswal Financial Services expects a recovery in the Communications vertical (40 per cent of revenue) to precede any re-rating in the stock multiple and hence retans its 'Neutral' rating. "We see the need to invest back into the business as the key limitation to its aim of margin improvement," it said.

At 11:34 am, Tech Mahindra was trading 2 per cent higher at Rs 891 on the BSE, as compared to a 0.85-per cent rise in the S&P BSE Sensex. A combined 3.5 million equity shares had changed hands on the counter on the NSE and BSE till the time of writing of this report.