Tech Mahindra missed street forecast on Tuesday with the fourth quarter consolidated profit falling 39.2 percent sequentially to Rs 472 crore, dented by lower margin and higher forex loss.
Speaking to CNBC-TV18, Vibhor Singhal, analyst, Phillip Capital said they have down downgraded the EPS estimates of Tech Mahindra by 12-15 percent. The financial house also downgraded the stock to neutral from a buy rating.Below is verbatim transcript of the interview:
Q: Have you cut your estimates on Tech Mahindra, have you downgraded the stock, what would be your view and when do you think recovery will come for the company?
A: We have downgraded our estimates both for FY16 and FY17. Our EPS estimates are down by 12-15 percent. We have also downgraded the stock from buy to neutral rating. We now have a price target of Rs 590 on the stock.
We believe concerns are more on the margin front for the company than the growth front. 15.2 percent margins were way off the estimates that we were expecting.
However, more importantly if you hear the management commentary, the integration of Lightbridge Communications Corporation (LCC) which they acquired last year in November is going to take some time. So, the margins for LCC are also down from the usual 7-8 percent to around 2.5 percent in this quarter. They also had a lot of integration cost which the management believes will continue for the next couple of quarters.
We believe it will be very difficult for the company to ramp up the margins from where they are currently in Q4 to a significant level of upside. That compares with the entire theory that when LCC was acquired then the company will be able to do more off shoring and ramp up the margins from 7-8 percent to maybe 12 percent levels. So, that remains a big concern on the stock.
Q: The other concern is the revenue growth. The organic revenue growth is down some 4.4 percent and much weaker than the rest of its peers and the management also on the call indicated that the decision making has slowed down quite a bit. So, for FY16 what kind of revenue growth are you penciling in and do you think it will continue to underperform its peers?
A: On the revenue front, growth concerns are not that big. In FY15 if you strip out the last quarter impact of LCC, they still grew by around 16 percent on an organic basis.
In FY16 if you see, there are going to be three quarters of LCC integration that is going to come in. So, that will add USD 300 billion of revenue from the inorganic part as well.
Even on a quarterly side if you see, they de-grew by 4.4 percent on quarter-on-quarter (QoQ) basis but in that there was a 320 basis point huge impact of cross currency movement. However, for that the growth was minus 1.2 percent which we were expecting more or less to be flat.
There was a small disappointment on the topline front. However, I believe the topline is not that big a concern for the company as probably the margins are.
Q: Would you recommend investors to buy Tech Mahindra and considering that for the next few quarters the outlook is a little bleak on margins at least, would you recommend to buy that stock at any point in time in the next few quarters? What would be an attractive entry point for a retail investor?
A: For any investor it is more to do with the time than the price for the stock right now. I would rather invest taking a couple of quarters into my hand and see how the margins pan out and then probably look to enter the stock.
The stock might react negatively today and might still continue to react negatively for the next couple of weeks. However, it has got to do more with the clarity as to where the margins are headed then I would want to enter the stock.
If the stock is below Rs 550 levels then it makes an attractive proposition but we at Phillip Capital believe that the stock is going to remain sideways for at least next two to three quarters because of the overhang of the margin concerns.
Q: So you won’t enter in immediately or in next few quarters?
A: I won’t recommend so.
Q: The management commentary was cautious enough for you to believe that a lot of the other IT companies could also go through a bit of a rough patch?
A: Not necessarily. If you see Tech Mahindra, 45 percent of their business comes from the telecom domain and also they are very small in retail and other verticals. So, as I said the guidance per se was not that very negative.
They are seeing weaknesses in telecom, they are seeing weakness in energy and utilities but that is something which all the companies have anyways mentioned. So, I wouldn’t go incrementally negative on any other company because of the management guidance.
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