Tech Mahindra posted Q4FY21 income development of 1.6% q-o-q (USD) and .7% (CC) to $1,330 mn, reduced than our and Street’s estimates of 1.5% (USD) and 1.9% (cc), respectively. Ebit margin expanded 60bps q-o-q to 16.5%, surpassing our and Street’s estimates of 16% and 15.8%, respectively. Profit declined 18.5% q-o-q to Rs 10,814 mn vis-à-vis our estimate of Rs 12,179 mn. New deal wins through the quarter had been at $1,043 mn, up 129% q-o-q.
We count on the deal momentum to remain sturdy more than coming quarters led by the manufacturing and BFSI segments. For FY22, management expects to provide double-digit income development and 15%-plus Ebit margin. All in all, we preserve Buy with an unchanged TP of Rs 1,450 (25x Q2FY23e).
Structural shift towards digital: All verticals (except Retail, Transport & Logistics) grew q-o-q in Q4FY21. BFSI, Manufacturing and Communications grew the strongest, up 4.9%, 1.9% and 1.4% q-o-q, respectively. Technology, Media & Entertainment remained flat. By area, Europe and ROW posted healthier development of 2% q-o-q and 6.2% q-o-q, respectively, though Americas slid 1.3% q-o-q. Net new deal-wins had been divided equally involving enterprise and communication, and spread across US and EU.
Operating margin was robust: Ebitda margin, up 40bps q-o-q to 20%, is its highest in six years, and elevated on the back of operational efficiencies, delivery transformation, more offshoring and greater utilisation, which had been only partially offset by the enhance in SG&A (due to hiring). FCF stood at $187 mn in Q4FY21 FCF to PAT stood at 127%. Strong money flow benefitted from reduced DSO, which decreased by 3 days to 92. Utilisation at 87% is sturdy and, therefore, most likely to moderate going ahead. Tax provision is greater due to one-offs at two subsidiaries, which impacted PAT.
Outlook: Upcycle to sustain – TECHM has a sturdy deal pipeline for FY22, mostly driven by transformational bargains and its close involvement with the 4 hyperscalers. Management is focussing on buyer transformation bargains. The stock is trading at 17.4x FY22e PE. All in all, we preserve ‘BUY/SN’.