Tech Mahindra's share price hits a new high as the company targets the $100 billion cloud opportunity and guns for 5G

Tech Mahindra's share price hits a new high as the company targets the $100 billion cloud opportunity and guns for 5G
Tech MahindraBCCL
  • Tech Mahindra’s share price hit a new high of ₹910 apiece after announcing its plans to target $100 billion in cloud services and its leverage in 5G.
  • According to analysts, the company is well poised to gain from the global increase in IT spend and has the healthiest deal pipeline of the last four quarters.
  • However, Tech Mahindra CFO Manoj Bhat notes that the gains from the company’s investments in 5G are unlikely to kick in before the next fiscal year.
Tech Mahindra’s share price is up by 1.5% after analysts gave the company an optimistic review. The company even hit a fresh 52-week high of ₹910 per share in early trade.

Tech Mahindra's share price hits a new high as the company targets the $100 billion cloud opportunity and guns for 5G
Tech Mahindra share price since 1 January 2020BSE/BI India

The key factors driving the rally behind Tech Mahindra are 5G and cloud migration.

On the one hand, the company believes there’s a multi-billion dollar opportunity in 5G network services, which it calls ‘Network Services 3.0’. On the other hand, it also wants to get its hands on the $100 billion in IT services spend, expected to come through large deals, data centre monetisation, and scaling up software-as-a-service (SaaS) platforms.

“We remain positive on the company as it is well poised to capture improving IT spend in communication and digital traction on the enterprise side. Further, in the long term, we believe TechM will be a key beneficiary of 5G opportunities,” noted ICICI Direct.

BrokerageTarget price
Edelweiss₹ 1,253
CLSA₹ 1,030
Jefferies₹ 1,000
Morgan Stanley₹ 980
Emkay₹ 1,070
Motilal Oswal₹ 940
Nirmal Bang₹ 1,017
Source: Respective reports

The gains from 5G won’t kick in till next year
Like many other industries, 5G has not been immune from the effects of COVID-19. The roll-out of the new network has slipped on the list of priorities for many in the battle against the pandemic.

Even though Tech Mahindra’s focus is squarely on 5G, there is a lack of clarity around the timeline, according to Motilal Oswal.

While the IT services company will definitely gain if and when 5G emerges full throttle, especially as a partner with the Japanese Rakuten Mobile, it won’t likely be in the current fiscal year.

“Activity in the telecom sector is starting to happen, both in the IT and networks side. But the network side revival has been slower. It has grown slower than the rest of the business. We still believe 5G will appear more in FY 22, and not in the current fiscal,” Tech Mahindra CFO Manoj Bhat told Business Insider in an interview last month.

Currently, Tech Mahindra sees 5G as a $63 to $83 billion opportunity between 2020 to 2025. According to Jefferies, the company is well-placed to leverage the 5G cycle once it kicks off.

A new strategy for cloud and platforms
Global spending on cloud services is expected to hit $1 trillion in 2024 spurred by the COVID-19 pandemic, according to the International Data Corporation (IDC).

The strongest growth in the ‘as a service’ category set to account for more to 60% of cloud revenues worldwide.

Within that, Tech Mahindra is targeting the smallest cloud category — infrastructure build. This includes hardware, software, and support for enterprise private clouds and service provider public clouds.

According to the management, there are currently 73 large deals in the pipeline, which shows a 20% growth over the last six months. “Deal pipeline healthiest in the last four quarters,” noted Morgan Stanley.

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