Investments In AI And Partnerships With NVIDIA And AWS Will Improve Operational Efficiencies

Key Takeaways

• Strong deal wins in key sectors and strategic partnerships are set to drive robust future revenue growth and operational efficiencies.
  
• Successful cost optimization and strategic investments are boosting margins and enhancing long-term client engagement and service offerings.
  
• Tech Mahindra's heavy reliance on large clients, specific sectors, and lumpy deals poses revenue risks amid currency fluctuations and competitive pricing pressures.

Catalysts

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

• Tech Mahindra is focused on improving growth capabilities and revenue mix, aiming for an EBIT margin of 15% by FY '27, which could potentially boost earnings and margins.
  
• New deal wins and partnerships, particularly in telecom, automotive, BFSI, and healthcare, indicate strong future revenue growth prospects.
  
• Investments in AI and partnerships with NVIDIA and Amazon Web Services are expected to drive operational efficiencies and new revenue streams.
  
• Expansion of leadership and strengthening of partner ecosystems are likely to enhance client engagement and service offerings, bolstering long-term revenue growth.
  
• Successful implementation of Project Fortius is driving cost optimization and operating leverage, improving net margins despite headwinds.

Tech Mahindra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tech Mahindra's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 11.8% in 3 years time.
• Analysts expect earnings to reach ₹80.2 billion (and earnings per share of ₹93.54) by about January 2028, up from ₹37.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, down from 39.7x today. This future PE is lower than the current PE for the IN IT industry at 32.8x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.58%, as per the Simply Wall St company report.

Tech Mahindra Future Earnings Per Share Growth

Risks

• Tech Mahindra's reliance on a few large clients and sectors such as telecom could expose it to revenue risks if those clients reduce spending or if there's sector-specific downturns, affecting overall revenue stability.
  
• The company faces ongoing pressures from currency fluctuations which have impacted current revenue figures, posing a risk to future profitability if such fluctuations continue.
  
• Manufacturing vertical decline, particularly due to automotive sector challenges, raises concerns about the potential for reduced revenue from this segment.
  
• Intense competition, especially in telecommunications and other key sectors, could lead to pricing pressures, limiting Tech Mahindra's ability to maintain or increase net margins.
  
• The dependency on large deals, which are inherently lumpy, poses a risk to consistent revenue and profit growth, particularly if the deal pipeline slows or conversion rates decrease.

Valuation

• The analysts have a consensus price target of ₹1714.62 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 ₹2030.0, 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 2028, revenues will be ₹678.3 billion, earnings will come to ₹80.2 billion, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹1681.15, the analyst's price target of ₹1714.62 is 2.0% higher. 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.