Brokerage firm Kotak Institutional Equities has downgraded Tech Mahindra Ltd to add from buy rating at a target price of Rs 1175 a share.
The downgrade comes after the stock rallied 10 percent since the start of May till date. The rally is attributed to the appointment of the former president of Infosys, Mohit Joshi as company's new Managing Director and Chief Executive. Meanwhile, its peers in the same period were trading mixed. Infosys rose 2.7 percent, TCS lost 0.5 percent and Wipro declined 0.4 percent.
Kotak believes that the CEO-designate has the potential to make significant improvements to the overall well-being of the business. However, they acknowledge that there are numerous challenges ahead, as the turnaround needs to be executed without any room for additional investments and requires the elimination of low-quality, low-margin business portfolios.
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"We value Tech Mahindra at 16X June 2025E EPS (from March 2025E EPS earlier). We cut FY2024 and FY2025 revenue estimates by 1% as we bake in a weaker demand environment. Our EPS remains unchanged as we bake in moderate Rupee depreciation in our estimates", said Kotak in its latest report.
Kotak predicts a modest 0.8% growth in US dollar revenue for FY2024. This forecast takes into account various factors, including the repercussions of the program and IT restructuring initiated by a major telecom client, the streamlining of unprofitable businesses, unexpected challenges arising from acquired businesses, and the discretionary nature of acquisitions in spending areas.
Additionally, a slowdown in the industry and the leadership transition will contribute to subdued growth. Kotak expects a currency-adjusted (c/c) revenue growth of 0.5% for FY2024, which is comparatively weaker than its peers. The struggle to maintain margins is expected to persist.
"We expect an uptick in growth in FY2025E as the demand environment improves and a few company-specific factors fade. We do not assume any meaningful rationalization of unprofitable businesses. As a result, the margin may not hit the desired goal," Kotak said in its report.
"At a broader level, we do note that TM has a reasonable set of competencies and vertical presence— these include leadership in telecom, strength in manufacturing (especially autos) and improving presence in financial services. Further, it has a good presence in some of the service lines, especially experience design services and network services. The full impact of the interventions of Mohit Joshi will also be visible by FY2025E. We forecast c/c revenue growth of 8.9% and EBIT margin expansion by 160 bps in FY2025E", Kotak report added.
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