Weekly tactical pick: Tech Mahindra

This IT player expects revenue pick-up from the second half of 2019-20. So, a high single-digit revenue growth trajectory should not be difficult.

 

We are recommending Tech Mahindra as our weekly tactical pick.

Tech Mahindra (CMP: Rs 626) reported a disappointing performance in the June quarter, marked by weak revenues and a steep decline in margin.

Revenue in reported currency for Q1 FY20 at $1,247 million saw growth of 1.9 percent compared to the previous year and constant currency growth of 3.7 percent. Sequentially, however, revenue declined by 1.6 percent. Weakness was seen in both the communication and enterprise segments. While the former was due to seasonality impact in Comviva (Mahindra Comviva is a global leader in mobility solutions for fast-growing telecom and other new age businesses), the latter was impacted by weakness in auto (especially electric vehicles in China) and BFSI segment.

The company’s margin declined sequentially by a steep 390 basis points to 11.5 percent impacted by myriad factors like weakness in portfolio companies, salary hike, higher visa cost, cross currency headwinds and lower utilisation and deal transition costs.

However, there is a silver lining amid the dark clouds. Deal flow momentum has been strong and company alluded to a strong pipeline especially in communications. The management has indicated acceleration in revenue from the second half of the current fiscal year, as past deal wins are translated into revenues. Seen in this context, high single-digit revenue growth trajectory should not be difficult.

Adoption of 5G technology is a big opportunity for Tech Mahindra and FY21 is likely to see traction on this front.

What investors got to remember about the stock is its undemanding valuation of 11.2 times FY21 estimated earnings - one of the cheapest large cap IT stocks. The stock is close to its 52-week low price of Rs 608 having corrected over 14.6 percent in the past six months compared to 1.4 percent rise in the Nifty and 1.1 percent for the IT index. Rupee depreciation in light of the deteriorating macro could be an added upside.

MORE WILL UPDATE SOON!!