Tech Mahindra shares plunge 8% after Q4 numbers; top brokerages remain mixed

Shares of Tech Mahindraplunged nearly 8 percent in early trade on BSE on May 4, reacting to the company's March quarter numbers released on the previous trading session on April 30.

Tech Mahindra March quarter results were below analyst estimates, and the pain seen in the March quarter is likely to extend in Q1FY21, suggest experts. The IT company on April 30 posted a 29 percent year-on-year fall in profit at Rs 803.9 crore for the quarter ended March 2020.

Brokerages have a mixed view on the stock. While some maintained their positive stance on the stock, some cut the target prices and some analysts downgraded the stock to sell.

CNBC-TV18 reported Morgan Stanley has maintained an 'overweight' call on the stock with a target price at Rs 680 and said that Q4 performance was weaker than expected as COVID-19 impaired growth and margin.

Morgan Stanley is of the view that the company has an opportunity to gain market share in BPS.

"Margin improvement plan could get pushed out by a year. We cut EPS estimates by 11 percent for FY21 and 3 percent for FY22," said Morgan Stanley.

It highlighted that the valuation of the stock is cheap against other large-cap peers.

As per CNBC TV-18, Macquarie has an 'outperform' call on Tech Mahindra but cut the target price to Rs 738 from Rs 839.

"Higher exposure to BPS business will put pressure on growth in near-term," said Macquarie, adding that the delay in deal ramp-ups due to COVID-19 induced uncertainty will weigh on growth.

CLSA has maintained 'outperform' call on Tech Mahindra but cut the target price to Rs 635 from Rs 920, reported CNBC-TV18.

"We see headwinds from slowed discretionary spending in the enterprise segment. Margin will be under pressure in FY21 on lower volumes and pricing discounts. We cut revenue estimates by 16-17 percent and margin by 200-250 bps for FY21-22," said CLSA.

CLSA added that continued strong deal win momentum provides hope of a recovery in the second half of the year.

Jefferies has a buy call on the stock. It raised the target price to Rs 615 from Rs 590.

As per CNBC-TV18, Jefferies underscored that the disappointing Q4 as communications business was surprisingly weak and the performance of the company was disappointed on both revenue growth & EBIT margin.

Jefferies finds a total contract value of $505 million a silver lining.

"Revenue decline led by communications though some of this is likely transitory. 5-G spend ramp-up and demand-side pressures will be key going forward," said Jefferies.

Kotak has a 'buy' call on Tech Mahindra but cut the target price to Rs 360 from Rs 680. The brokerage expects Tech Mahindra's EBIT margin to decline to 10.2 percent in FY21.

Kotak said it saw growth normalisation in FY22 after a poor FY21. It has trimmed FY21-22 EPS estimates by 10-22 percent on Q4 disappointment.

Investec has a buy call on the stock with a target price at Rs 630.

"Q1FY21 is likely to be another quarter of meaningful revenue declines. We cut our FY21 and FY22 EPS estimates by 4.3 percent and 0 percent, respectively," said the brokerage.

Investec said its estimates factor in revenue drops over Q1 and Q2 and weak margin in the first half of the year and added that the revenue and margin performance in Q1 will be key to stock performance.

Motilal Oswal downgraded the stock to Neutral with a target price of Rs 590.

Sharp revenue decline and EBIT margin contraction were disappointing given the COVID-19 impact on March were only limited to just two to four weeks across the core geographies.

This indicates what lies ahead in subsequent quarters when the full impact of the COVID-19 crisis is likely to kick in. Tech Mahindra has been slower in enabling work-from-home (WFH) access in comparison to its peers, indicating supply issues may not completely ease out in the near-term.

Motilal Oswal downgraded its EPS estimates over FY21–22E by 22–25 percent in light of the disappointing results and downbeat commentary.

Edelweiss Securities maintained its buy rating on Tech Mahindra post-March quarter results but slashed its 12-month target price to Rs 640 from Rs 796 earlier.

“We believe the current quarter pain is likely to extend in Q1FY21 as well and is in line with our trimming of estimates (on 9th April 2020) for the company and the sector. In view of the current uncertainty and lower growth, we trim our multiple to 14.5x (16.0x earlier), in line with a cut in our sector multiples,” said the note.

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