Tech Mahindra TEML.

NS TECHM IN

EQUITY: SOFTWARE & SERVICES

Maintain Neutral Global Markets Research

31 July 2019
Disappointing results, though already factored in the
Rating
stock price Remains Neutral
Action: Reiterate Neutral with a lower TP of INR700 (~9% upside) Target Price
Reduced from 800 INR 700
1Q was below already muted expectations on both revenue growth/margins.
TechM lowered its outlook for the Enterprise vertical (~58% of revenue) to Closing price
mid-single-digit growth for FY20F from high-single digits previously. However, 30 July 2019 INR 640
this implies an asking rate of ~4% CQGR over 2Q-4Q, which in our view will
be difficult, given: 1) weakness in BFSI/Retail due to delayed decision making Potential upside +9.3%
at clients, though TechM expects some recovery here starting 2Q; 2)
headwinds in manufacturing (large auto exposure where global outlook is Anchor themes
weak) are likely to persist in 2QF. Further, we are less optimistic on building a
We prefer companies that have a
significant uptick even in Telecom (~42% of revenues), as: 1) we believe the
better skew towards growing
5G cycle will be more prolonged and full adoption is likely to come in FY21F;
segments, are available at
2) traction at top clients (~31% of revenue) continues to be weak, indicating a
reasonable valuations and more
possible loss of share, in our view. We look for USD revenue growth of ~5%
protected against US immigration
for FY20F, driven by ~6.1% growth in Telecom and ~4.1% in Enterprise. On
tightening.
EBIT margins, we expect bottoming out at current levels of 11.5% given
tailwinds of wage hikes, likely improvement in subsidiary profitability, visa
Nomura vs consensus
costs and an uptick in utilization as growth picks up. We expect EBIT margins of
13% for FY20F (lower than TechM’s earlier guidance of ~15%). Overall, we look Our TP is ~10% lower vs
for a USD rev/EPS CAGR of ~6%/4% over FY19-22F. We remain Neutral. consensus on lower EPS
estimates.
1Q: Disappointing results
Revenues declined 1.6% q-q vs our expectation of -0.9%, and EBIT margin
Research analysts
was 11.5% vs our estimate of 13.2%. Positives: 1) Deal TCV remained strong
at USD475mn; 2) TechM is confident in achieving its revenue outlook driven India Technology/Services &
by deal pipeline in Telecom and improvement in BFSI/Health in Enterprise. Software
Negatives: 1) Broad-based weakness ex-others segment; 2) Enterprise
Rishit Parikh - NFASL
outlook lowered to mid-single-digit growth; and 3) top clients continue to drag. rishit.parikh@nomura.com
EPS cut by 8-10%; lower TP to INR700 (from INR800 earlier) +91 22 4037 4360
We cut EPS by 8-10% on ~1% lower revenues and 1-2pp lower EBIT margins Pallav Jain - NFASL
over FY20-22F. We now value TechM on 14x (vs 15x earlier) 1-yr-fwd EPS of pallav.jain@nomura.com
INR49.7. We reiterate our Neutral rating; HCLT (HCLT IN, Buy) is our top pick. +91 22 4037 4187
Risks: Better-than-expected traction in Enterprise and margins.

Year-end 31 Mar FY19 FY20F FY21F FY22F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 347,421 372,917 362,457 397,746 389,448 422,535 414,190

Reported net profit (mn) 42,916 46,170 40,719 47,918 43,058 50,528 45,489
Normalised net profit (mn) 40,662 46,170 40,719 47,918 43,058 50,528 45,489
FD normalised EPS 45.51 51.56 46.22 53.51 48.88 56.42 51.64
FD norm. EPS growth (%) 6.6 13.3 1.6 3.8 5.7 5.4 5.6
FD normalised P/E (x) 14.1 N/A 13.9 N/A 13.1 N/A 12.4
EV/EBITDA (x) 8.6 N/A 9.3 N/A 8.4 N/A 7.7
Price/book (x) 2.8 N/A 2.5 N/A 2.3 N/A 2.1
Dividend yield (%) 2.2 N/A 2.8 N/A 3.1 N/A 3.1
ROE (%) 21.9 21.3 19.1 19.7 18.3 18.6 17.6
Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash
Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart. Production Complete: 2019-07-31 01:29 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Tech Mahindra 31 July 2019

Key data on Tech Mahindra

Relative performance chart Cashflow statement (INRmn)
Year-end 31 Mar FY18 FY19 FY20F FY21F FY22F
EBITDA 47,170 63,368 59,581 63,362 65,875
Change in working capital 401 4,216 -21,116 -4,499 -5,066
Other operating cashflow -13,881 -15,750 -14,566 -14,782 -15,646
Cashflow from operations 33,690 51,835 23,898 44,081 45,162
Capital expenditure -9,507 -7,877 -20,206 -9,758 -7,395
Free cashflow 24,183 43,958 3,692 34,323 37,768
Reduction in investments -8,314 3,066 774 0 0
Net acquisitions -11,635 1,833 -166 0 0
Dec in other LT assets 0 0 0 0 0
Inc in other LT liabilities 0 0 0 0 0
Adjustments
CF after investing acts 4,234 48,857 4,300 34,323 37,768
Source: Thomson Reuters, Nomura research Cash dividends -14,835 -14,821 -18,871 -20,968 -20,968
Equity issue 1,341 -11,738 -594 0 0
Notes: Debt issue 5,065 -3,213 10,186 0 0
Convertible debt issue 0 0 0 0 0
Others 12,468 4,010 7,314 7,000 8,137
CF from financial acts 4,039 -25,763 -1,965 -13,968 -12,831
Performance Net cashflow 8,273 23,094 2,335 20,355 24,937
(%) 1M 3M 12M Beginning cash 58,119 66,392 89,486 91,821 112,176
Absolute (INR) -9.4 -23.4 -2.3 M cap (USDmn) 8,971.6 Ending cash 66,392 89,486 91,821 112,176 137,112
Absolute (USD) -9.2 -22.4 -2.6 Free float (%) 16.0 Ending net debt -49,132 -75,439 -67,588 -87,943 -112,879
Rel to NIFTY50 -4.3 -18.7 -1.2 3-mth ADT (USDmn) 29.9
Balance sheet (INRmn)
Income statement (INRmn) As at 31 Mar FY18 FY19 FY20F FY21F FY22F
Year-end 31 Mar FY18 FY19 FY20F FY21F FY22F Cash & equivalents 66,392 89,486 91,821 112,176 137,112
Revenue 307,730 347,421 362,457 389,448 414,190 Marketable securities 0 0 0 0 0
Cost of goods sold -225,063 -243,753 -264,197 -284,624 -304,678 Accounts receivable 94,396 98,650 103,534 109,892 117,052
Gross profit 82,667 103,668 98,260 104,824 109,513 Inventories 0 0 0 0 0
SG&A -46,346 -51,592 -51,186 -54,414 -56,998 Other current assets 44,079 54,817 61,069 64,769 68,934
Employee share expense Total current assets 204,867 242,953 256,423 286,837 323,099
Operating profit 36,321 52,076 47,074 50,410 52,514 LT investments 15,116 12,050 11,276 11,276 11,276
EBITDA 47,170 63,368 59,581 63,362 65,875 Fixed assets 34,115 30,700 38,400 35,206 29,240
Depreciation -10,849 -11,292 -12,506 -12,952 -13,360 Goodwill 44,508 42,675 42,841 42,841 42,841
Amortisation Other intangible assets 0 0 0 0 0
EBIT 36,321 52,076 47,074 50,410 52,514 Other LT assets 5,766 6,091 6,988 7,417 7,900
Net interest expense -1,624 -1,332 -1,835 -1,842 -1,842 Total assets 304,372 334,469 355,928 383,576 414,356
Associates & JCEs Short-term debt 0 0 0 0 0
Other income 14,092 5,342 9,149 8,842 9,979 Accounts payable 84,012 103,048 91,842 96,727 102,228
Earnings before tax 48,789 56,086 54,388 57,410 60,652 Other current liabilities 9,581 9,753 10,978 11,652 12,411
Income tax -10,925 -14,798 -13,693 -14,353 -15,163 Total current liabilities 93,593 112,801 102,820 108,379 114,639
Net profit after tax 37,864 41,288 40,695 43,058 45,489 Long-term debt 17,260 14,047 24,233 24,233 24,233
Minority interests 136 -627 24 0 0 Convertible debt 0 0 0 0 0
Other items 0 0 0 0 0 Other LT liabilities 0 0 0 0 0
Preferred dividends Total liabilities 110,853 126,848 127,053 132,612 138,872
Normalised NPAT 38,000 40,662 40,719 43,058 45,489 Minority interest 5,091 4,777 4,708 4,708 4,708
Extraordinary items 0 2,254 0 0 0 Preferred stock 0 0 0 0 0
Reported NPAT 38,000 42,916 40,719 43,058 45,489 Common stock 4,417 4,437 4,350 4,350 4,350
Dividends -14,835 -14,821 -18,871 -20,968 -20,968 Retained earnings 184,011 198,407 219,816 241,906 266,426
Transfer to reserves 23,165 28,094 21,847 22,089 24,520 Proposed dividends
Valuations and ratios Other equity and reserves 0 0 0 0 0
Reported P/E (x) 14.8 13.2 13.7 13.0 12.3 Total shareholders' equity 188,428 202,844 224,166 246,256 270,776
Normalised P/E (x) 14.8 14.0 13.7 13.0 12.3 Total equity & liabilities 304,372 334,469 355,928 383,576 414,356
FD normalised P/E (x) 15.0 14.1 13.9 13.1 12.4
Dividend yield (%) 2.2 2.2 2.8 3.1 3.1 Liquidity (x)
Price/cashflow (x) 16.9 11.0 23.6 12.8 12.5 Current ratio 2.19 2.15 2.49 2.65 2.82
Price/book (x) 3.0 2.8 2.5 2.3 2.1 Interest cover 22.4 39.1 25.6 27.4 28.5
EV/EBITDA (x) 12.1 8.6 9.3 8.4 7.7 Leverage
EV/EBIT (x) 15.7 10.5 11.7 10.6 9.7 Net debt/EBITDA (x) net cash net cash net cash net cash net cash
Gross margin (%) 26.9 29.8 27.1 26.9 26.4 Net debt/equity (%) net cash net cash net cash net cash net cash
EBITDA margin (%) 15.3 18.2 16.4 16.3 15.9
EBIT margin (%) 11.8 15.0 13.0 12.9 12.7 Per share
Net margin (%) 12.3 12.4 11.2 11.1 11.0 Reported EPS (INR) 43.21 48.43 46.61 49.28 52.07
Effective tax rate (%) 22.4 26.4 25.2 25.0 25.0 Norm EPS (INR) 43.21 45.88 46.61 49.28 52.07
Dividend payout (%) 39.0 34.5 46.3 48.7 46.1 FD norm EPS (INR) 42.71 45.51 46.22 48.88 51.64
ROE (%) 21.5 21.9 19.1 18.3 17.6 BVPS (INR) 214.25 228.90 256.58 281.86 309.93
ROA (pretax %) 16.5 21.6 18.5 18.8 19.1 DPS (INR) 14.00 14.00 18.00 20.00 20.00
Growth (%) Activity (days)
Revenue 5.6 12.9 4.3 7.4 6.4 Days receivable 105.0 101.4 102.1 100.0 100.0
EBITDA 12.7 34.3 -6.0 6.3 4.0 Days inventory 0.0 0.0 0.0 0.0 0.0
Normalised EPS 33.0 6.2 1.6 5.7 5.6 Days payable 124.4 140.1 135.0 120.9 119.2
Normalised FDEPS 33.8 6.6 1.6 5.7 5.6 Cash cycle -19.4 -38.6 -32.9 -20.9 -19.2
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

2
Nomura | Tech Mahindra 31 July 2019

Fig. 1: Telecom, media & entertainment USD rev growth y-y Fig. 2: USD rev growth for enterprise segment verticals (y-y)
TechM has seen an improvement in Telecom, led by base effects and TechM lowered outlook to mid-single-digit growth in FY20F (vs high single
strong deal TCV. We expect a ~6.6% CAGR over FY19-21F (vs 1.1% digits earlier) in Enterprise led by weakness in BFSI/Manufacturing
growth in FY19) in Telecom. (especially Auto).
30% 100%
Tier 1 IT Tech M Mfg BFSI Retail Others
80%
20%
60%
8%
10% 40%
5%
20%
0%
0%
-1%
-10% -20%

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20
1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Fig. 3: Top 5 and Top 10 clients traction Fig. 4: Utilisation (incl. trainees) and Offshore mix trends (%)
Top 5 and Top 10 clients traction have been weaker over the past couple We expect EBIT margins to bottom out from current levels of 11.5%, led
of years, indicating possible loss of share, in our view. Top clients by tailwinds from wages, visa costs, subs profitability and utilization.
concentration at TechM at ~31% is ~2x that of peers and remains a risk. However scope from offshoring and SGA remains limited.

15% Top 5 Clients Top 10 Clients 8% IT Utilization % Offshore mix (RHS)

6% 86%
10% 52% 84%
4% 52%
83%
5% 2%
0% 80% 47%
0% 82%
-2%
-5% 77%
-4% 42%
-10% -6% 74%
-8% 35% 37%
-15% 71% 74%
-10%
-20% -12% 68% 32%
1QFY13
3QFY13
1QFY14
3QFY14
1QFY15
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18
3QFY18
1QFY19
3QFY19
1QFY20
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20

Source: Company data, Nomura research Source: Company data, Nomura research

Fig 5: EBIT margins and sub-contractor trends (%)
We expect EBIT margins of 13.0%/12.9%/12.7% over FY20/21/22F as
operational levers are limited (ex. utilization) and see risks to margins from
rising onsite costs (reflected in rising subcontractors) and higher attrition.
Fig. 6: 1-year-forward P/E trends
Post the ~20% fall in the stock price; TechM is now trading at 13.6x and
adequately builds in the risks to growth/margins. Hence, we reiterate our
Neutral rating and value TechM on 14x (~5% discount to history) to
account for weaker growth/margins.

25% EBIT margins Subcontractor cost (%) 15.0% P/E Avg P/E
24
22% 14.1%
14.0% 21.1
20
19% 12.7% 12.9%
13.0% 16
16% 15%
13% 14.7 13.6
12.0% 12
13% 11.1
12%
8
10% 11.0%
11.5%
4
7% 10.0%
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20

0
Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Feb-19

Source: Company data, Nomura research Source: Company data, Nomura estimates

3
Nomura | Tech Mahindra 31 July 2019

Fig. 7: Deal wins (include both telecom and enterprise businesses)

600 Deal wins (USD mn) Average 550

500
500
440
408
400
350 340 364
325 325 325
300
300 300 300 270

200

100

Source: Company data, Nomura research

Fig. 8: Standalone and Subsidiary EBIT margin profile.

Standalone EBIT margin Subsidiaries EBIT margin

25%

20%
20% 19%
18%

15% 15% 15% 14%

15% 13%
12%
11% 11% 11%
10%
7% 8%
6%
5% 5%
5%

0%
1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20
-2%
-5%

Source: Company data, Nomura research

Key management comments

• Telecom: TechM indicated that growth excluding Comviva seasonality was flattish q-q
in CC in 1Q. TechM continues to expect Telecom to lead growth in FY20 and now
guides for high-single-digit growth in FY20. In terms of 5G, while it is seeing
investments in initial trials across geographies, TechM thinks that FY21 is when the
momentum is likely to pick-up materially at Telecom players.
• Enterprise: Weakness in Enterprise is due to softness in BFSI, Manufacturing
(especially Auto) and Europe. While manufacturing will continue to be weak in 2Q due
to weakness in Auto, according to management, TechM indicated some pickup in BFSI
led by the ramp-up in large deal won in 1Q and Healthcare will continue to lead on
growth. TechM now guides for a mid-single growth in the Enterprise business for
FY20F. However, we note that this implies asking rate of ~3.8% CQGR from 2Q-4Q in
USD terms, which is aggressive, in our view. We look for USD revenue growth of
~4.1% in the Enterprise vertical for FY20F.

4
Nomura | Tech Mahindra 31 July 2019

 BFSI: TechM expects volatility in BFSI given higher exposure to transformational

work and lower annuity business and the recent weakness is also due to delayed
decision making at some clients.
 Manufacturing: Weakness in TechM is due to sluggishness in the Auto vertical
(some due to China EV market) where TechM does a lot of engineering services
work. Ex of Auto, TechM indicates strong traction in Aero and expects overall growth
in 2Q to be flattish and 2H to be better in the manufacturing vertical.
• Healthcare: While the current projects are short-term implementations, TechM is
focused on winning long-term multi-year contracts, especially in the provider segment,
to provide reasonable comfort and future growth in this vertical.
• Deal wins: Of the USD475mn deal TCV won in 1Q, USD100mn was in the Telecom
vertical, while USD375mn was in the Enterprise vertical. TechM thinks that the large
deal pipeline is skewed more towards the Communication vertical currently, and work
spans across service lines for the company.
• Deal translation to revenues: Despite strong deal wins, revenue growth has been
tepid on weak traction at top clients, and one of its large enterprise customer is going
through a change period, which is impacting revenues. However, TechM management
thinks that those headwinds are behind and that the company should see better deal
translation to revenues going forward.
• EBIT margins: EBIT margins were down 390bp q-q and were impacted by: 1) deal
transition costs (30bp); 2) utilization (60bp); 3) seasonality and portfolio companies’
drop (150bp); 4) visa costs (40bp); 5) salaries (100bp); and 6) INR appreciation (40bp).
This was offset by benefits from 1) lease accounting (60bp) and 2) lower SGA (90bp).
TechM now thinks ~13% EBIT margin is achievable in FY20 vs its earlier indication of
flattish margins compared to FY19 (at ~15.1%). However, TechM thinks it can provide
more clarity only post 2Q once it closes the deals that are currently in the pipeline.
• Rise in subcontractor costs: Subcontractor costs increased 90bp in 1Q, led by higher
revenue contribution from HCI acquisition and technology, media and entertainment
vertical which requires specific skill-sets for a short duration of 1-2 quarters.
• Mad*Paw and recent acquisitions: TechM announced the acquisition of US-based
strategic design consultancy Mad*Paw for ~USD25mn, of which it has currently
acquired a 65% stake for USD17mn; the remaining stake will be acquired over the next
three years. The deal was completed on 30 July 2019 and provides TechM access to
~70 employees (designers, researchers, creative technologists, psychologists and
creative thinkers). We see a positive change in M&A strategy at TechM given the
recent acquisitions have been in acquiring digital and engineering capabilities vs legacy
acquisitions earlier.

EPS cut by 8-10% on lower revenue/margins, TP down to

INR700 (vs INR800 earlier)
We cut our USD revenue growth estimates by ~0.5-1.5% on the 1Q miss and weaker
outlook in the Enterprise vertical. Our EBIT margins are lower by 120-200bp, led by: 1)
the 1Q miss of ~170bp vs our estimate despite ~60bp benefit from lease accounting; and
2) USD-INR reset to 69.5 vs 70.5 earlier. As a result, our EPS estimates are lower by 8-
10% over FY20-22F, and we now look for EPS of INR46.2/INR48.9/INR51.6 over
FY20/21/22F.
We value TechM on a 1-notch lower multiple of 14x 1-yr-fwd EPS of INR49.7 to arrive at
a TP of INR700 (implying 9% upside from current levels). The 14x is multiple is ~5%
below its 5-year average history on weaker growth and margin outlook for FY20F. We
reiterate our Neutral rating on the stock.

5
Nomura | Tech Mahindra 31 July 2019

Fig. 9: Estimate revisions

New Old Change (%)
FY20F FY21F FY22F FY20F FY21F FY22F FY20F FY21F FY22F
Revenue (US$ mn) 5,217 5,604 5,960 5,290 5,642 5,993 -1.4 -0.7 -0.6
USD/INR 69.5 69.5 69.5 70.5 70.5 70.5 -1.5 -1.4 -1.4
Revenue (Rs bn) 362 389 414 373 398 423 -2.8 -2.1 -2.0
EBIT margin (%) 13.0 12.9 12.7 15.0 14.3 13.8 -210 bps -130 bps -120 bps
Diluted EPS (Rs) 46.2 48.9 51.6 51.6 53.5 56.4 -10.3 -8.6 -8.5
Source: Nomura estimates

1Q: Disappointing quarter even on muted expectations

• Revenues of USD1,247mn, declined 1.6% q-q vs our forecast and the Bloomberg
consensus estimate of -0.9%/1.1%. The miss on revenues was due to higher-than-
expected declines in the Telecom vertical led by Comviva seasonality and flattish q-q
CC growth ex of Comviva.
• EBIT margins were at 11.5% vs our/consensus estimates of 13.2%/13.1% despite IND
AS benefit. EBIT margins were down 390bp q-q and were impacted due to 1) deal
transition costs (30bp), 2) utilization (60bp), 3) seasonality and portfolio companies’
drop (150bp), 4) visa costs (40bp), 5) salaries (100bp) and 6) INR appreciation (40bp).
This was offset by benefits from 1) lease accounting (60bp) and 2) lower SGA (90bp).
• Other income was at INR3.4bn vs our estimate of INR1.6bn. Higher other income was
driven by higher FX gains compared to our estimates.
• PAT was at INR9.6bn vs our/consensus estimates of INR9.6bn/INR9.7bn. Despite the
miss on revenues and margins, PAT was in line due to higher other income.
• Overall headcount grew 3.9% q-q, with 4.4% q-q growth in BPO and 3.7% q-q growth in
IT services.
• Utilisation (excluding trainees) was 82% vs 82% in 4QFY19 and utilisation including
trainees was at 80% vs 82% in 4QFY19.
• Offshore revenue mix at 34.7% vs 34.8% in 4QFY19.
• Receivable days were at 110 days vs 102 days in 4QFY19.
• CFO/EBITDA was 52% vs 80% in 4QFY19 due to 8 days increase in receivable days,
primarily driven by unbilled revenue.
Segmental: Americas, Healthcare, BPO led growth
• Geographies: Americas (+0.9% q-q), Europe (-5.1% q-q) and ROW (-2.1% q-q) in
USD terms.
• Verticals: BFSI (-3.7% q-q), Retail (-4.4% q-q), Telecom (-3.2% q-q), Technology,
media & entertainment (-0.04% q-q), Manufacturing (-5.4% q-q) and others (+15.0% q-
q) in USD terms.
• Services: IT services declined 2% q-q while BPO grew 2.5% q-q in USD terms.
• Clients: Revenue for the top 5 clients declined 7.7% q-q and for the top 10 clients
declined 5.6% q-q in USD terms.

Fig. 10: Actuals vs estimates

Key parameters 1QFY20 4QFY19 q-q (%) 1QFY19 y-y (%)
Actual Estimate
Revenues (USD mn) 1,247 1,255 1,268 -1.6 1,224 1.9
Revenues (INR mn) 86,530 87,220 88,923 -2.7 82,763 4.6
EBIT (INR mn) 9,928 11,463 13,683 -27.4 10,761 -7.7
EBIT margin (%) 11.5 13.1 15.4 -390bp 13.0 -150bp
Adj. PAT 9,593 9,573 11,266 -14.8 8,076 18.8
Adj. Dil. EPS 10.9 10.7 12.6 -13.4 9.1 20.2
Source: Company data, Nomura estimates.

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Nomura | Tech Mahindra 31 July 2019

Fig. 11: Segmental growth trends (% q-q in USD)

1QFY19 1QFY19 2QFY19 4QFY19 1QFY20
Geography
Americas 0.0 0.0 -2.9 -1.5 0.9
Europe -0.6 -0.6 -1.5 -0.4 -5.1
ROW -6.3 -6.3 6.3 5.7 -2.1
Verticals
Telecom -6.4 -6.4 4.3 4.4 -3.2
Manufacturing 2.5 2.5 -0.5 -0.9 -5.4
TME (Tech, Media, Entertainment) -3.0 -3.0 0.9 7.7 0.0
BFSI 2.9 2.9 -1.2 -1.7 -3.7
Retail -3.2 -3.2 6.0 -4.0 -4.4
Others 4.6 4.6 -16.8 -9.3 15.0
Top clientele
Top 5 -7.1 -7.1 5.9 1.4 -7.7
Top 10 -2.2 -2.2 0.1 1.8 -5.6
Top 20 -0.5 -0.5 -1.8 3.0 -4.9

Total -1.6 -1.6 -0.5 0.5 -1.6

Source: Company data, Nomura research

Fig. 12: Segmental growth trends (% y-y in USD)

1QFY19 1QFY19 2QFY19 4QFY19 1QFY20
Geography
Americas 11% 11% 7% -0.2% 0.7%
Europe 8% 8% 2% -1.5% -6.0%
ROW 1% 1% -2% 10.4% 15.4%
Verticals
Telecom -6% -6% -2% 4.6% 8.1%
Manufacturing 12% 12% 8% 6.6% -1.6%
TME (Tech, Media, Entertainment) 29% 29% 27% 4.7% 7.8%
BFSI 2% 2% -1% 2.6% -4.0%
Retail -4% -4% -7% 5.2% 3.9%
Others 74% 74% 17% -17.5% -9.4%
Top clientele
Top 5 -9% -9% -3% 0.1% -0.4%
Top 10 -4% -4% -4% -0.3% -3.8%
Top 20 2% 2% 2% 0.5% -3.9%

Total 8% 8% 3% 2% 2%

Source: Company data, Nomura research

Fig. 13: Relative valuation table

Mkt cap Price Target Target P/E P/E (x) EV/EBITDA (x)
Com pany Ticker Rating (USDbn) (LC) Price m ultiple FY20F FY21F FY20F FY21F
HCL Tech. HCLT IN BUY 20.7 1,024 1,270 14.0x 12.5 11.5 8.0 7.3
Cognizant CTSH US NEUTRAL 37.6 65 69 16.0x 16.9 15.1 10.6 9.1
Infosys INFO IN NEUTRAL 50.3 793 720 17.5x 21.3 19.6 14.9 13.5
TCS TCS IN NEUTRAL 118.8 2,179 2,000 20.0x 24.3 22.6 17.8 16.3
Wipro WPRO IN REDUCE 23.0 262 235 14.0x 16.7 15.7 11.0 10.0
Tech Mahindra TECHM IN NEUTRAL 9.1 640 700 14.0x 13.9 13.1 9.4 8.5
Hexaw are HEXW IN NEUTRAL 1.5 355 340 15.0x 16.9 15.6 12.0 10.5
Mphasis MPHL IN BUY 2.6 959 1,110 16.0x 15.5 14.1 10.0 8.8
Source: Bloomberg, Nomura estimates. Note: Share prices are as of 30th July 2019.

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Nomura | Tech Mahindra 31 July 2019

Appendix A-1
Analyst Certification
I, Rishit Parikh, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The terms "Nomura" and "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC('ILLC'), U. S. registered broker dealers and members of SIPC.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures
HCL Technologies HCLT IN INR 1024 30-Jul-2019 Buy N/A
Tech Mahindra TECHM IN INR 640 30-Jul-2019 Neutral N/A

Tech Mahindra (TECHM IN) INR 640 (30-Jul-2019) Neutral (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
06-Feb-19 800.00 811.35
31-Oct-18 765.00 743.90
03-Oct-18 745.00 750.15
03-Aug-18 690.00 662.75
28-May-18 675.00 675.25
30-Jan-18 580.00 602.95
02-Nov-17 475.00 467.95
01-Aug-17 425.00 402.45
26-May-17 435.00 429.15
31-Jan-17 500.00 452.20
08-Nov-16 490.00 454.15
02-Aug-16 505.00 499.20

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of INR700 is based on a 14x 1-yr fwd EPS of INR49.7. The 14x multiple we assign is at a 5%
discount to history. The benchmark index for this stock is Nifty 50.

Risks that may impede the achievement of the target price Key upside risks include faster-than-anticipated revival in
telecom, and better than expected EBIT margins. Downside risks include further deterioration in momentum of the enterprise
business and margins.

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Nomura | Tech Mahindra 31 July 2019

HCL Technologies (HCLT IN) INR 1024 (30-Jul-2019) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
10-May-19 1,270.00 1,086.65
30-Jan-19 1,235.00 1,018.40
10-Dec-18 1,170.00 942.00
03-Oct-18 1,265.00 1,091.30
30-Jul-18 1,100.00 947.15
26-Jun-18 Buy 910.40
26-Jun-18 1,050.00 910.40
03-May-18 Neutral 925.70
03-May-18 1,060.00 925.70
22-Jan-18 1,100.00 966.35
26-Oct-17 1,050.00 869.05
28-Jul-17 1,030.00 893.10
24-Oct-16 1,010.00 810.65
04-Aug-16 975.00 823.85

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of INR1,100 is based on 14x 1-year forward EPS (up to Sep-20F) of INR78.7. The 14x
multiple is in line with historical average. The benchmark index for this stock is the Nifty 50.

Risks that may impede the achievement of the target price Key downside risks include deterioration in global macro,weaker-
than-expected revenue growth, and any deterioration in margin outlook.

Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.
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Distribution of ratings (Nomura Group)

The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
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5% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 14% of companies with
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EEA) with this rating were supplied material services by the Nomura Group.
As at 30 June 2019.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation

Distribution of ratings (Instinet, LLC)

The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
54% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

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Nomura | Tech Mahindra 31 July 2019

4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

Definition of Nomura Group's equity research rating system and sectors

The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
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additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Target Price
A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's
estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and
by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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