Stock To Invest: Multibagger IT Stock Approves Rs. 18 Dividend, Q2 Revenue Up 21%, Buy Stock

Top brokerage firm Emkay Global has given a buy rating to the stock of Tech Mahindra. The company declared a special interim dividend of Rs. 18/share. Its investments in 5G, Metaverse, customer experience, and network operations continue to see strong traction in demand.

Stock To Buy: Target Price

The Current Market Price (CMP) of Tech Mahindra is around Rs. 1071. Emkay Global has estimated a Target Price for the stock at Rs. 1200. This stock has the potential to give a 12.1% return, in the upcoming 1 year. It is a large-cap stock with a market capitalization of around Rs. 105,305 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 1071
Target Price	Rs. 1200
Potential Upside	12.10%
52-week high share price	Rs. 1,838
52-week low share price	Rs. 943.70

Q2 Financials

Tech Mahindra reported a 4% YoY fall in consolidated net profit in Q2 Rs. 1,285 crore, but revenue for the said quarter increased by around 21% YoY to Rs. 13,129 crore. In Q2FY23, its revenue was broadly in line with the expectations, but EBITM missed our estimates. Revenue grew by 0.3% QoQ to USD1,638mn (2.9% CC QoQ), led by CME (3.1%) and Enterprise (2.8%). Adjusted EBITM expanded by 30bps QoQ to 11.4%.

Stock Upside

Management expects steady margin improvement in H2; however, it remains non-committal to the earlier indicated exit margins of ~14%, sighting the possibility of growth moderation and adverse cross-currency movement. Broad-based revenue growth, moderation in attrition (19.6% in Q2 vs. 22.2% in Q1), uptick in utilization (84.9% in Q2 vs. 82.8% in Q1), and healthy cash generation (OCF/EBITDA ~115%) are key upsides. However, EBIT margin miss and continued softness in BFSI is a key downside.

Stock Valuation

Giving a buy rating, Emkay Global said, "We have tweaked our FY23-FY25E EPS estimates by -0.8% to 0.3%, factoring in Q2 performance. TechM's margin performance has been volatile in the past and the pace of recovery remains slower than the management's earlier guidance. We maintain our Buy rating with a target price of Rs. 1,200 at 16x Sep-24E EPS, considering steady revenue growth supported by deal wins and traction in 5G, anticipated margin recovery, and over 4% dividend yield."

Margin expansion and utilization

Improving geographic mix (increasing share of the U.S. and Europe), growing share of digital engineering revenue, and focus on project-level profitability are expected to drive margin expansion structurally. Utilization improved by 200bps QoQ to ~85% and management foresees headroom for further improvement. ETR was lower in Q2 due to tax reversal and normalized ETR is expected to be 25-26%. Hedge book stood at USD2.4bn at the end of Q2 and forex MTM gain of ~USD59mn is booked in OCI.

Disclaimer

The above stock was picked from the brokerage report of Emkay Global. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.