Tech Mahindra may show signs of recovery in the second quarter — much depends on 5G and BPO business outlook

• Tech Mahindra is unlikely to outperform its peers but will show signs of recovery in the second quarter, according to analysts.
• Much of its performance will depend on the commentary around its 5G and BPO businesses.
• Communications accounts for 40% of Tech Mahindra’s revenue.
  

Tech Mahindra has been lagging behind its peers when it comes to growth, and the COVID-19 pandemic didn’t help. As the second quarter rolls in, analysts are hopeful that — like other Indian IT services giants, including Tata Consultancy Services (TCS), HCL Technologies, Wipro, and Infosys — Tech Mahindra will also benefit from the rebound in demand.

“Deal wins are likely to revert to pre-COVID levels, in our view, and the pipeline continues to be robust across both communications and enterprise businesses,” said the Japanese brokerage Nomura.

Tech Mahindra's Q2 earnings expectations

Brokerages on Tech Mahindra	Expected quarterly growth of revenue in constant currency (CC)	Expected expansion of margins
Nomura	1.8%	190 bps
Phillip Capital	3.6%	50 bps
HDFC Securities	-0.7%	118 bps
ICICI Direct Securities	2.5%	152 bps

Even though analysts don’t expect a massive recovery, Tech Mahindra’s growth is mainly dependent on the recovery of its communication business, which accounts for 40% of its revenue.

“Tech Mahindra will be the biggest beneficiary of rising confidence on 5G outlook in US/Europe,” noted Prabhudas Lilladhar.

All eyes on BPO and 5G segments
Tech Mahindra doesn’t have too much exposure to businesses heavily affected by the pandemic like retail, travel, and energy, which is likely to play its favour. Instead, for Tech Mahindra, the pain points to address are its BPO and 5G segments, according to Nirmal Bang.

Its BPO business, in particular, took a hit due to the lack of client approvals for work from home on the one hand and supply issues on the other. The segment may have seen traction improve over the last three months with vendor consolidation, indicates Nomura.

When it comes to 5G, Tech Mahindra indicated that network operators are showing sluggish behaviour. Commentary on long-term plans of 5G roll-out will be critical.

“We expect TechM to lag, as we think it is unlikely to see the full reversal of supply-side impact during the first quarter, especially in the network services business,” said Nomura.

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