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“Source: Economic Times ”

Tech Mahindra’s 2018-19 fourth quarter results were a mixed bag. The company’s telecom segment, which contributes around 40% to its revenue, has sustained its growth momentum. It grew 4% year-on-year in dollar terms, making it the third successive quarter of healthy growth.

The telecom segment is expected to improve its growth rate further and the introduction of 5G services will be a major trigger. However, most operators across the world are still in the process of testing and building 5G infrastructure , so its full impact will be visible only in 2020-21.

Tech Mahindra’s enterprise segments, however, reported a quarter-on-quarter (q-o-q) fall in revenue in the fourth quarter. Except the technology, media and entertainment verticals, all enterprise business sub-segments saw a q-o-q fall in revenue. However, this high q-o-q volatility is normal for enterprise businesses because they are project based and so there will be some gap between finishing one project and starting another.

Since the order flow is still intact— deals won during 2018-19 amount to Rs 11,862 crore ($1.7 billion)— the company’s long-term growth prospects are still robust. This is why analysts expect Tech Mahindra to report around 8% revenue growth in dollar terms in 2019-20, despite the likely muted growth from the enterprise segment. As most analysts expect the rupee to remain stable now, revenue growth in rupee terms also will be at similar levels.

Though Tech Mahindra’s growth rate is slightly lower than that of its peers, it has been factored-in the stock price. As visible from the valuations table, Tech Mahindra is now trading at significant discount to its peers. This discount is expected to narrow in the coming years, especially once the market starts recognising the increased growth from Tech Mahindra’s telecom vertical. Its Ebitda margin is also rising.

Due to favourable factors—higher employee utilisation, cost rationalisation in the recently-acquired companies, revenue mix shifting from onshore to offshore, etc.—analysts feel there’s is room for further margins improvement. Ebitda stands for earnings before interest, tax, depreciation and amortisation.

Since fixed costs are less for IT companies, Tech Mahindra’s net profit growth will be more than Ebitda growth. More importantly, the management’s position of returning excess cash to shareholders via buybacks and dividends should boost return ratios and investor sentiments.