No direct impact of Russia-Ukraine conflict on IT sector– Tech Mahindra
Update on the Indian Equity Market:
On Wednesday, NIFTY50 closed 312 points higher at 16,975 (+1.87%). All the sectoral indices closed in the green with REALTY (+3.6%), METAL (+2.6%), and PRIVATE BANK (+2.4%) being the top gainers. Among the individual stocks, ULTRACEMCO (+4.6%), AXISBANK (+3.5%), and BAJAJ-AUTO (+3.3%) were the top gainers while CIPLA (-1.3%), SUNPHARMA (-0.4%), and TATACONSUM (-0.1%) were the top losers.
Excerpts of an interview with Mr. C.P. Gurnani, MD & CEO, Tech Mahindra, published in Mint on 15th March 2022:
- The main demand drivers are 5G and digital transformation, the legacy businesses preferring to move towards cloud; high demand for electric vehicles; increasing needs for cybersecurity; and sustainability.
- Keeping that in mind, Tech Mahindra is betting big on opportunities in 5G and digital transformation. With the recent launch of TechMVerse, it has forayed into the metaverse space. For the first year, the company is planning to hire 1,000 people dedicated to TechMVerse. The operations will be spread across four hubs – Dallas, Hyderabad, London, and Pune.
- Along with that, expanding the global reach by opening up new centers in tier-2, tier-3 cities like Latvia, Romania, and Costa Rica is creating more requirements for new hires. The company is targeting to hire from tier-2 cities like Bhubaneshwar, Chandigarh, Kolkata, Indore, and Coimbatore, as the level of skills is extremely good and attrition rates are much lower.
- Although metaverse is a key differentiator, being a new technology, it will be initially incubated in a smaller group and then shared with the clients. Initially, the metaverse offerings including DealerVerse – metaverse-based car dealership; Middlemist – an NFT marketplace; or Meta Bank – a virtual bank, will be run as a separate unit. Eventually, will work together with various other verticals. The early adopters of metaverse are the gaming, healthcare, retail, and banking sectors.
- The company has made 8 acquisitions in FY22 to build capability, de-risking the portfolio, and for geographic expansion.
- Concerning the ongoing Russia-Ukraine conflict, the company will have no direct impact as the Indian IT sector is not dependent on either of the two countries.
Asset Multiplier Comments:
- The intensity of tech spending is expected to increase as clients are willing to spend on IT via Capex and Opex. Cloud spend is a minimum 3- 4 years opportunity for the IT sector. The second round of IT spend is on artificial intelligence, augmented reality, virtual reality, data analytics, and IoT.
- We believe Tech M is well positioned to capture a fair share of 5G network services spends and strong growth in communication will continue in FY23E. Spreading talent base to Tier 2 cities in India and Nearshore centres will help reduce employee cost by ~15% and also lower attrition rate. We expect increase in utilization rate and gradual reduction of sub-con costs (on the back of reducing attrition rate) will lead to margin expansion in FY23E.
Consensus Estimate: (Source: Marketscreener & TIKR website)
- The closing price of Tech Mahindra was ₹1,488/- as of 16-March-2022. It traded at 21x/ 18x the consensus earnings per share estimate of ₹72/₹81.5 for FY23E/FY24E respectively.
- The consensus target price of ₹1,787/- implies a P/E multiple of 22x on FY24E EPS estimate of ₹81.5/-
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”
