Tech Mahindra Ltd - Research Report

Private Client Research




IT - Software


Tech Mahindra Ltd

IT - Software

September 05, 2018

Sensex: 38018.31

CNX Nifty: 11476.95


BSE: 532755

Reco Price
Rs. 768.00
Price Target (1 Year)
Rs. 925.00


September 05, 2018



CNX Nifty








Stock Data

CMP (Rs)
Face value (Rs)
52 Week Range (Rs)
776.50 - 418.05
Market cap (Rs Crores)
Price To Book Value (x)
P/E Ratio (x)

One Year indexed Stock Performance

Tech Mahindra Ltd Sensex
Tech Mahindra Ltd
Return (%)


(in %)

+91 22 6639 3000


Tech Mahindra Limited (Tech Mahindra) is engaged in the business of computer programming, consultancy and related services. The company operates in two segments - Information Technology (IT) Services and Business Processing Outsourcing (BPO) with focus on the telecom sector and enterprise solutions business. The company’s telecom business provides consulting-led integrated portfolio services to telecom equipment manufacturers and telecom service providers. It provides its IT services, BPO and enterprise services to the banking, financial services and insurance (BFSI), retail and logistics, and manufacturing sectors, among others, through a network of various locations around the world. The company’s enterprise solutions business provides IT services, including IT enabled services, application development and maintenance, consulting and enterprise business solutions, extended engineering solutions and infrastructure management services.

Mr. Anand Mahindra (Chairman) heads the US $20.7 billion Mahindra Group and is the Executive Chairman of Mahindra & Mahindra Ltd. Since he has taken charge, the Group has expanded domestically and internationally into a range of major industrial sectors from automobiles and agriculture to IT and aerospace. The Group has also grown inorganically through acquisitions such as Ssangyong Motors, Reva Electric Car Company, Satyam Computer Services, Peugeot Motorcycles, Gippsland Aeronautics, Aerostaff Australia, Holiday Club Resorts and Pininfarina S.p.A.

Mr. C.P Gurnani (CEO & Managing Director), popularly known as ‘CP’ within his peer group, is an accomplished business leader with extensive experience in international business development, start-ups and turnarounds, joint ventures, and mergers and acquisitions. CP has led Tech Mahindra's transformation journey and one of the biggest turnarounds of Indian Corporate History - the acquisition and merger of Satyam.

His inimitable style of leadership combined with his sharp focus on customer experience has helped Tech Mahindra emerge as one of the leading digital IT solution providers of India. In a career spanning 36+ years, CP has held several leading positions with Hewlett Packard Ltd, Perot Systems (India) Ltd. and HCL Corporation Ltd. CP has also served as Chairman of NASSCOM for the year 2016-2017. An outstanding people manager, CP has an entrepreneurial style of management that is a blend of enthusiasm and dynamism. He has always focused on people's strength to bring out the best in them. 'Work hard and play hard' is his motto and he applies it to all aspects of his life with complete passion.

Communication and enterprise segment to drive future growth; expected improvement in margins a positive

Tech M 3-4-3 strategy:
Tech Mahindra builds diversified and deep relationships with its customers. The company has rolled out a strategy termed as “3-4-3 strategy”, which means addressing 3 Megatrends that are taking place in the markets, 4 bets that Tech Mahindra would take to address those mega trends and which fits into the 3 areas of a CXO’s priorities.

The three mega trends which the company believes will provide immense opportunities are 1) Explosion of connected devices ~20 billion connected IoT devices by 2023, 2) Data Explosion ~75% of data would be consumed by Video and 3) The power of new network technologies like 5G, which will enable an ‘always connected’ experience.

4 Tech bets defining Tech Mahindra’s future:
Tech Mahindra has planned to focus on the following 4 areas that it expects will be of prime importance in the future:

Customer Experience Management - Orchestrate the interplay of design, digital and convergence to deliver connected customer experiences.

The customer experience of today is not just about CRM, website or call centre, but an integrated journey that will be redefined for a digital future. With the acquisition of BIO Agency and Pininfarina, Tech Mahindra is well placed to integrate physical, digital designs and user experiences to create connected experiences, which are world class, seamless and phenomenal.

Software Transformation - The company believes that business velocity enabled by software will be the differentiator for future enterprises. It offers Agile DevOps, open source & automation to build higher velocity-stability to change faster while running better. This has been Tech Mahindra’s historical strength. The company has proven capabilities to support its customers transform at a faster pace.

Network of the Future - Creating the foundation for a connected world by creating intuitive networks where physical and digital come together. Tech Mahindra’s ability to create very software intense, intelligent network architecture, coupled with its proven DNA across Networks and Communication industry will be the differentiator where the company can go the extra mile to help its customers.

Internet of Things (IoT) - To drive ‘connected everything’ by being the largest systems orchestrator in the world. Tech Mahindra has developed 50+ use cases and has partners across the entire IoT ecosystems, enabling to deliver various niche & new use cases across the connected world. The company’s ‘Factory of Future’ offerings and ‘Smart City’ offerings have enabled various industries & cities to be connected. Tech Mahindra has also enabled Telco(s) to become connected consumer service providers.

These 3 mega technology trends and 4 key tech bets will help address CXO’s IT priority for his company which includes running better, changing faster and growing greater.

Avenue Supermarts Ltd

Communication business to be driven by investment in 5G:
The growth of the telecom vertical remained flat owing to consolidation of leading telcos, industry restructuring and setting up standards for 5G implementation. As a result, the telecom vertical, which contributed ~42% to the overall revenues, has been muted over the last two years

Implementing 5G will require support of the network applications and strong network integration. 5G will not only cover conventional voice and data, it will also include data analytics-driven services, video and enhanced video, etc. There will be an increasing amount of innovation over time as the technology usage spreads extensively.

Service providers have now started to digitize their offerings in order to survive in the competitive and changing business environment. The company’s strategy hovers around customer experience, Network transformation and IoT which strengthens its position to ride the wave of capex to opex spend. Transformation agenda by service providers will gain momentum going forward. The company’s top clients like AT&T and Verizon have already committed capex for 5G.

Cyber security operation centre:
Tech Mahindra has collaborated with the state government of Andhra Pradesh to establish the country’s first Cyber Security Operations Centre (APCSOC) in the city of Vijayawada. Due to an increasing number of cyber crimes, the demand for cyber security has been on the rise from banks, insurance companies and a number of corporates.

‘Makers Lab’ gaining traction:
Tech Mahindra has set up an R&D arm ‘Makers Lab’ at UK, Plano, Dallas, US and Munich Germany. Makers Lab will focus on major technologies such as Artificial Intelligence (AI), Machine Learning (ML), Robotics, Internet of Things (IoT), Augmented Reality/ Virtual Reality, 5G – Network of the future and quantum computing to make citizen services and experiences simpler and easier especially in the communications space. Tech Mahindra now has seven R&D centres globally. The company is witnessing increasing interest in Makers Lab from current and prospective clients.

Enterprise momentum to be flag bearer:
The management is upbeat on the growth of the Enterprise segment. The company has seen sustained outperformance in this business due to large deals that it has bagged, lower levels of traditional services and higher levels of engineering services, especially after acquisition of Mahindra Engineering Services (MES). The Enterprise segment is expected to grow at a double digit rate in FY19.

Operating metrics expected to further improve:
Annual margins have scope for further expansion; while some of the easy measures may already have been undertaken, the management believes that it still has levers such as automation, improving the offshore proportion, flattening the employee pyramid and better profitability of acquired companies. The headwinds of last year in the telecom vertical are unlikely to recur in FY19, and that should support overall growth to some extent.

Mergers and Acquisitions:
The company has built a stronger ecosystem (through M&A activities) for improving its digital services, which remains at the forefront to bring enterprise-wide transformation.

Avenue Supermarts Ltd


India is the topmost off shoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies have been offering an entirely new gamut of opportunities.

As per NASSCOM Strategic Review Report 2018, India’s IT-BPM industry stood at USD ~167 billion and employs around 4 million people. It continues to be the leader in the global sourcing market with a ~55% share. Despite the slowing down in growth rates due to the base effect, the industry has added ~USD 24 billion in revenue since last year and continues to be a net hirer, having addition of ~100,000+ in FY 2018. Share in total service exports is estimated over 45% and the industry’s contribution relative to India’s GDP is ~7.9%.

Digital technology is throwing up a new set of opportunities for the technology industry and over the past few years, the business has seen a shift in revenue share (currently, digital share is between 18%-20% and increasing), talent (India accounts for 75% share in global digital talent), business models (partnerships, As-a-Services, etc.), revenue source (IP-led, platforms, cloud) and organisational structure (dedicated Business Units or BUs, Centres of Excellence or CoEs, etc.).

The industry comprises 17,000+ firms that offer a complete range of services. In the age of digital technologies, the industry has been adept at building the necessary skills and capabilities to address new and changing customer demands. Over the past few years, firms have made substantial investments in building their portfolio of capabilities around these technologies and have set up a number of labs and CoEs to deliver digital services to customers. Consequently, the industry is now well equipped to manage the stage of Bi-modal IT.

While global sourcing growth has outperformed global IT-BPM spends growth in 2017, global sourcing grew 1.4X to reach USD 185-190 billion. India continued as the world’s No.1 sourcing destination with a share of ~55%. 271 new global delivery centres were set up worldwide in 2017 - India accounted for ~24% share and Europe ~29%. Currently the traditional services (ISO, CADM, software testing, F&A, HRO, etc.) continue to have a major share of revenue (~80%), while the share of digital revenue is increasing rapidly. From about 14% in FY2016, it is now ~18% and is expected to reach 38% by 2025. The industry also has an ever growing set of start-ups – 5,000-5,200 – making India the world’s 3rd largest start-up ecosystem. Many of these are digital first companies and are working on very niche technologies like – AI, blockchain, robotics, etc.

As per the NASSCOM Strategic Report 2018, in CY 2017 the Global IT-BPM industry stood at USD 1.3 trillion (excl. hardware) showing a growth of 4.3% over CY 2016. IT services grew 2.4% driven by the continuous need for digital solutions.

In FY2018, India’s IT-BPM industry is set to grow ~8%, from USD 154 billion in FY2017 to USD ~167 billion (excl. eCommerce), an addition of USD 12 billion. The IT-BPM Exports from India are expected to reach USD ~126 billion, a 7.7% growth over FY2017 and an addition of USD 9 billion. Overall, the industry is estimated to employ 3.97 million people, an addition of ~105,000 people over FY2017. The domestic IT services are likely to grow ~7.9% to reach USD 41 billion while eCommerce, a USD 38.5 billion market, is seen to grow nearly 17% y-o-y. backed by an increase in online transactions.

As per India’s IT-BPM Industry Association – NASSCOM, the outlook for the Indian information technology (IT) sector is steady, with a positive bias for FY2019. It expected the export revenues to grow to ~$135-137 billion from the $126 billion in FY 2018, a growth of ~7-9%. The Domestic revenues are expected to grow 10-12% to ~$28-29 billion in the financial year 2018-19. The industry body expects digital spends to grow 20% annually.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar
Net Sales 26494.20 29140.80 30772.90 38466.13 41543.42
Growth (%) 10.00% 6.00% 25.00% 8.00%
Power & Fuel Cost 168.80 187.90 194.70 243.38 262.85
% Sales 1.00% 1.00% 1.00% 1.00% 1.00%
Employee Cost 13947.50 15453.90 16624.00 20387.05 22018.01
% Sales 53.00% 53.00% 54.00% 53.00% 53.00%
Cost of Software developments 4699.90 5457.60 5402.20 6923.90 7477.81
% Sales 18.00% 19.00% 18.00% 18.00% 18.00%
Operating Expenses 615.10 689.60 668.90 836.12 903.02
% Sales 2.00% 2.00% 2.00% 2.00% 2.00%
General and Administration Expenses 2418.20 2656.00 2643.40 3461.95 3738.91
% Sales 9.00% 9.00% 9.00% 9.00% 9.00%
Selling and Marketing Expenses 131.40 196.30 185.70 200.00 216.00
% Sales 0.00% 1.00% 1.00% 1.00% 1.00%
Miscellaneous Expenses 382.00 476.10 371.50 400.00 450.00
% Sales 1.00% 2.00% 1.00% 1.00% 1.00%
Total Expenditure 22362.90 25117.40 26090.40 32452.40 35066.59
EBITDA 4131.30 4023.40 4682.50 6013.73 6476.82
EBITDA Margin (%) 16.00% 14.00% 15.00% 16.00% 16.00%
Other Income 578.70 938.60 1443.60 490.00 750.00
Interest 97.00 128.60 162.40 110.00 85.00
Depreciation 758.90 978.10 1085.00 1190.00 1250.00
Profit Before Tax 3854.10 3855.30 4878.70 5203.73 5891.82
Tax 830.10 1002.10 1092.60 1248.89 1414.04
Tax (%) 22.00% 26.00% 22.00% 24.00% 24.00%
Profit After Tax 3024.00 2853.20 3786.10 3954.83 4477.79
PAT Margin (%) 11.00% 10.00% 12.00% 10.00% 11.00%
Adjusted EPS 34.36 32.05 43.01 40.34 45.68
Source: Stockaxis Research, Company Data


We expect the communication business to boost growth going forward. This will lead to EBITDA margin expansion. Additionally, with the Indian currency devaluing, the company is expected to record substantial bottom line growth.

We recommend ‘buy’ with a target price of Rs. 925 at a P/E valuation of 20.50x its FY20E EPS. The stock currently trades at a PE of 17.25x FY19E and 15.25x FY20E EPS.