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Tech Mahindra shares likely to rebound after blockbuster AT&T deal

Analysts say revenue growth is crucial for the Mahindra group firm

  © Reuters

MUMBAI (NewsRise) -- Indian software exporter Tech Mahindra's big-ticket outsourcing deal with AT&T could breathe fresh life into the Mahindra Group company's shares, as it potentially bulks up the sagging communications business and raises the prospects of strong revenue growth.

Mumbai-based Tech Mahindra's shares have lost 2.4% since the beginning of 2019 after they gained 43% last year. In comparison, its larger rivals Tata Consultancy Services and Infosys saw their stock surge 14% and 24%, respectively, this year. The S&P BSE IT index added 13% during this period.

Tech Mahindra's shares have underperformed its rivals and the BSE IT Index as its weak earnings growth in the past two quarters raised concerns among investors about a further decline in margins.

However, the new deal could help the stock recover. Last week, Tech Mahindra announced one of its largest-ever project wins that could be worth $1 billion over the next four to five years. The contract entailed migration of the U.S. telecom behemoth's traditional operational and support software systems to cloud and drawing up its software-defined network for the next-generation cellular technology. Tech Mahindra declined to give any financial details of the deal.

The deal is likely to give a fillip to Tech Mahindra's financial performance, which has been lackluster in the past two quarters as the company struggled with client-specific issues and declining investments from automobile and financial services businesses.

Analysts say revenue growth is crucial for Tech Mahindra to expand its margins. The announcement of AT&T deal comes "as a booster to that effect," Motilal Oswal said in a report.

The project also underscores the strong deal momentum in the communications industry as operators prepare to modernize their infrastructure ahead of the launch of 5G mobile phone services.

Brokerage Edelweiss expects the deal to catapult Tech Mahindra's communications revenue -- which accounts for over 40% of its overall revenue -- to 12% over fiscal year 2019 to 2021 from 6.5%.

"While the deal ramp-up and transition may pressure margins, the potential for a re-rating of the stock is significant too as this landmark deal would boost the company's single-digit growth estimates currently," it said. Edelweiss has a target price of 935 rupees on the stock.

"We see this deal as an investment that Tech Mahindra is making to get a large referenceable project to market to the global telecom universe that is at the cusp of pivoting to the 5G era," Nirmal Bang said in a report Monday. The deal also augurs well for other Indian IT companies such as Tata Consultancy Services, Infosys, and Wipro which have substantial exposure to the communications sector and have partnerships with AT&T.

Tech Mahindra shares fell 1.3% to close at 703.70 rupees in Mumbai trading on Wednesday, while the benchmark S&P BSE Sensex gained 0.3%.

--Dhanya Ann Thoppil

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