Tech Mahindra Valuation Report FY21-22

Company Data
Market Cap (cr) Rs. 79,159
Enterprise Value (cr) Rs. 76,703
Outstanding Shares (cr) 96.6
Free Float 64.0%
Dividend Yield 1.8%
52 week high Rs. 888
52 week low Rs. 470
6m average volume (lacs) 2.1
Beta 0.8
Face value Rs. 5
Shareholding % Q4FY20 Q1FY21 Q2FY21

Promoters 35.9 35.8 35.8

FII’s 39.7 39.6 38.0
MFs/Insti 13.4 13.2 14.4
Public 8.3 8.4 8.6
Others 2.8 2.9 3.2
Total 100.0 100.0 100.0
Promoters’ pledge 0.0 0.0 0.0
Price Performance 3 Month 6 Month 1 Year

Absolute Return 34.2% 62.0% 16.7%

Absolute Sensex 6.7% 27.7% 4.2%
Relative Return* 27.5% 34.3% 12.5%

Tech Mahindra (TechM) impressed with significant expansion in margins, strong FCF
generation and decent deal wins. Constant currency (CC) revenue grew 2.9% q-o-q, ahead
of our estimates, led by 4.3% growth in enterprise segment and normalization of supply-
side challenges. Reported US Dollar revenues grew by 4.8% q-o-q to $1,265.4 million. EBIT
margin expanded by 410bps q-o-q to 14.2%, led by a recovery in demand side, absence
of supply-side constraints, cost management and normalization of seasonality in mobility
business. Net profit came in at Rs. 1,065 crore which was 9% above our estimates, led by
both revenue and margin beat, partially offset by lower other income. Post a material
impact in the wake of pandemic, revenue of BPS business in dollar terms grew 31% q-o-
q and margin improved sharply to 21.9% from 6.8% in Q1FY2021. TCVs of large deals
bounced back to $421 million, in-line with expectations, led by strong deal wins in its
communication vertical. During Q3FY2021, revenue growth in manufacturing and retail
vertical are expected accelerate, while technology and is expected to maintain its
growth momentum. Management sees traction in digital, network, customers experience
and cloud areas. Capex on 5G is expected to start in FY2022 as it was delayed owing to
COVID-19. Management expects double digit growth over next couple of years on the back
of anticipated growth in enterprise segment, potential 5G opportunities and strong deal
wins. On the margin front, the management maintained its earlier FY2021 EBITDA margin
guidance of 15% with an upward bias, despite strong EBITDA margin of 16.2% in
1HFY2021. We expect TechM’s USD revenue/ earnings to clock a CAGR of 10.5%/15.5%
over FY2021-FY23E.
 Robust operational performance
Tech Mahindra delivered decent performance in FY20 both on revenue and operational fronts. Revenue
stood at Rs 38,060 Cr (+7.30% YoY). Growth was driven by Enterprise led by investment in IPs and
traction in Manufacturing.
Trading at FY 22 Forward P/E of 15.30 at FY 22 EPS of Rs. 54, Tech Mahindra is recommended as a
BUY with target price of Rs 1400 with a long-term horizon (>12 Months) on terms with the Industry
P/E of 26.95.

25.00%
EPS GROWTH
20.00% 21.81%
18.66%
15.00% 17.57%
16.01%

10.00%
10.57%
5.00%

0.00%
2021E 2022E 2023E 2024E 2025E

Highlights
Forecast for the Next 5 Years
Particulars 2021E 2022E 2023E 2024E 2025E
Income Statement
Sales Growth 4.04% 6.89% 7.5% 8.2% 8.9%
Revenue 304061.0616 325001.4025 349373.6833 377902.8525 411505.0054
Cost Of Goods Sold 253495.9701 286549.7174 323913.3959 366148.9845 413891.7395
Distribution Expense (Percent of Sales) 0.3507% 0.6382% 1.1615% 2.1140% 3.8475%
Selling&Adminstration Expense (Percent of Sales) 7.12% 7.20% 7.35% 5.79% 9.72%
Miscellaneous Expense (Fixed Cost) 4441.166667 4441.166667 4441.166667 4441.166667 4441.166667
Other Income (Fixed) 13032.83333 13032.83333 13032.83333 13032.83333 13032.83333
EBITDA Margin 20.95% 23.46% 26.28% 29.43% 32.96%
Depreciation (Percent of Sales or PPE) 2.53% 2.58% 2.62% 2.79% 2.19%
Long Term Debt Interest (Percentage of Average
Debt) 39.55% 39.75% 44.13% 47.75% 39.38%
Tax Rate (Percent of EBT) 19.22% 20.08% 20.27% 17.08% 11.73%
Net Profit Growth 16.19% 16.51% 16.84% 17.18% 17.52%
EPS Growth 16.01% 18.66% 21.81% 17.57% 10.57%
EPS Estimates 54.46691122 62.77823512 71.67116098 77.16958348 80.63617231
 REVENUE GROWTH
2025E

2024E

2023E

2022E

2021E

0.00% 2.00% 4.00% 6.00% 8.00% 10.00%

Projected Revenues are estimated to grow close to 4% in FY22, inching toward 6-8%
post FY22. A projected growth rate of 4% is conservative since the actual financial
uncertainty posed due to the pandemic cannot be fathomed atleast 2 quarters into
FY22.

EBITDA GROWTH

35.00% 32.96%
29.43%
30.00% 26.28%
25.00% 23.46%
20.95%
20.00%
15.00%
10.00%
5.00%
S…
0.00%
2021E 2022E 2023E 2024E 2025E

EBITDA estimates are slated for a solid YoY growth close to 21% in FY22 and
upwards toward 30% post FY22 through FY25.
 LONG TERM DEBT
Opening Balance Add: New Loans taken
Less: Repayment of loan Closing balance
1,951

1,4001,400 1,3221,322
1,2731,273
1,104
1,002 917 1,002
862
618 618 678
487 538

84

2018 2019 2020 2021 2022

(78) 2023
(49) 2024
(384)

Increase in Long-Term Debt does not seem to be a Red-Flag compared to the Rate at which EBITDA is
growing.

Retained Earnings
200,000

150,000

100,000

50,000

-
2018 2019 2020 2021 2022 2023 2024 2025

Opening Balance Net Income for the year

Dividends paid for the year Closing balance

Retained Earnings projections ensure the Company is well placed to have sufficient capital on hand for
future growth and expansion.
Calculation of Free Cash Flow to the Firm
Calculation of Free Cash Flow 2022E
EBIT*(1-T) 37001
Non-Cash Expenses 6674
Change In (Current Assets-Current
Liabilities) 3044.1
CAPEX -7478
Free Cash Flow 39241.1
Discounted FCF @ 3.5% growth rate 37914.1063
To conclude this report, we reiterate that we initiate a BUY Rating on Tech Mahindra @ CMP of Rs.
826.30 with a target price of Rs. 1400 at a FY22 Forward P/E of 15.30 and FY22E EPS of Rs.54.
Adithya M
1812704