Tech Mahindra's shares fell more than 4 percent on July 26 as brokerages adopted a cautious 'wait-and-watch' approach, to evaluate how the company's execution strategy unfolds. Both Nomura and UBS flagged execution risks as a major concern. Additionally, the company's communication vertical saw a decline due to seasonal weakness in the Comviva business. While the company is gradually recovering, its operating margins remained among the lowest in its peer group.
The company's stock has gained 11 percent in the past six months. The stock surged over 16 percent in June and climbed nearly 7 percent in July.
While Bernstein was optimistic about Tech Mahindra's earnings and future growth, Nomura and Nuvama had a slightly cautious stance. UBS and Citi Research, both maintained their 'Sell' rating on the stock while also increasing their target price to Rs 1,250 and Rs 1,260.
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While acknowledging that Tech Mahindra's Q1 results were solid and that the company managed to overcome seasonal challenges, Nuvama maintained a 'Reduce' rating while also increasing its target price to Rs 1,200 from Rs 1,000. "TechM's first quarter after Mohit's strategy presentation was a decent one - overcoming its Q1 seasonality. But the road to its target is a long and winding one."
Nuvama also expressed concerns about the ongoing challenges in the telecom sector, which constitutes 33 percent of Tech Mahindra's revenue. The firm expects margins to face headwinds before benefiting from improvements in employee pyramid and subcontracting costs.
Nomura maintained a 'Buy' rating and set a target price of Rs 1,600, highlighting expectations of continued margin improvement. At the same time, the brokerage expects Tech Mahindra to experience a slight revenue decline of 0.5 percent in FY25, but anticipates a rebound with a growth of 6.1 percent in FY26.
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UBS said that Tech Mahindra seems like a turnaround candidate but the brokerage will wait for the strategy to unfold before revising its outlook. Citi Research is pencilling in 12.5 percent EBIT margins for FY26. However, it won't be easy without meaningful growth pickup, the brokerage said.
Bernstein had an 'Outperform' call on Tech Mahindra with a target price of Rs 1,390 per share, on the back of an EBIT margin beat and in-line revenue. Tech Mahindra's EBIT margin expanded by 110 basis point QoQ its to 18.5 percent in Q1 FY25 EBIT margin driven by cost-saving efforts under project Fortius and continued focus on operational efficiencies.
Apart from the telecom vertical which continued to face pressure, other sectors like healthcare and retail saw growth. However, on the bright side, the telecom's decline narrowed to a single digit from a 12.4 percent decline in FY24 and a steeper drop of 16.5 percent in Q4 FY24.
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