Investments In AI And Cloud Will Strengthen Future Competitiveness

Key Takeaways

• Strategic partnerships and project initiatives are driving improved margins and expected profitability through operational excellence and cost-efficiency.
  
• Investment in AI, cloud, and workforce skills is poised to enhance long-term growth, supported by significant deal wins and service portfolio expansion.
  
• Challenges in telecom and American markets, along with cautious deal execution, may hinder Tech Mahindra's revenue and earnings growth amidst competitive pressures.

Catalysts

Provides information technology services and solutions in the Americas, Europe, India, and internationally.

• Tech Mahindra is strengthening client relationships and expanding its partner ecosystem, with a focus on operational excellence and cost-efficiency. This approach could potentially increase net margins and overall earnings.
  
• The company's strategic initiatives in project Fortius have led to margin expansion for three sequential quarters, signaling expected improvement in operating margins and profitability.
  
• Investments in AI and cloud capabilities, along with a fresh graduate hiring program, aim to enhance long-term growth and workforce skills, likely impacting future revenue and earnings positively.
  
• New deal wins and partnerships, such as with major banks and tech companies, are expected to drive revenue growth, as evidenced by a $603 million deal win TCV in the recent quarter.
  
• Tech Mahindra's focus on expanding its service portfolio through collaborations with leading firms like Microsoft and Google Cloud is expected to boost revenue and possibly improve net margins by leveraging high-margin digital transformation services.

Tech Mahindra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tech Mahindra's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 11.7% in 3 years time.
• Analysts expect earnings to reach ₹77.6 billion (and earnings per share of ₹90.27) by about December 2027, up from ₹32.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹57.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.7x on those 2027 earnings, down from 47.6x today. This future PE is lower than the current PE for the IN IT industry at 45.0x.
• Analysts expect the number of shares outstanding to decline by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.55%, as per the Simply Wall St company report.

Tech Mahindra Future Earnings Per Share Growth

Risks

• Tech Mahindra reported a year-over-year decline in its communications vertical, citing weaknesses as key telecom clients prioritize cost savings, which could negatively impact future revenue growth.
  
• In the Americas, Tech Mahindra experienced a 2% year-over-year revenue decline, indicating potential challenges in a major market that might impact overall revenue performance.
  
• The manufacturing vertical reported only moderate growth and a conservative outlook for discretionary spending, which could constrain revenue growth prospects in this segment.
  
• Despite a strong overall strategy, uncertainties such as the timing and impact of large deals, as well as competitive pricing pressures, may affect future margin expansion plans.
  
• The company remains cautious about executing large deals without heroic assumptions on productivity gains, possibly limiting short-term growth opportunities if competitors are more aggressive, impacting potential earnings growth.

Valuation

• The analysts have a consensus price target of ₹1666.22 for Tech Mahindra based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2000.0, and the most bearish reporting a price target of just ₹1050.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹665.9 billion, earnings will come to ₹77.6 billion, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹1762.8, the analyst's price target of ₹1666.22 is 5.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.