Tech Mahindra stock slips on CLSA downgrade; analysts flag near-term struggles

Tech Mahindra was CLSA’s top pick and an anti-consensus call since January this year.

CLSA has downgraded Tech Mahindra to a "Hold" rating with a target price of Rs 1,670 per share, citing the recent strong rally and stretched valuations as reasons.

"The global telecom capital expenditure (capex) outlook remains weak, though deal wins are still robust. However, the commercialisation of enterprise 5G is expected to take time due to a lack of compelling use cases," noted the global brokerage.

Tech Mahindra may encounter several near-term challenges, particularly in its telecom vertical. Unlike its peers TCS, Infosys, and Wipro, Tech Mahindra has not announced any significant cost optimisation deals, the brokerage said.

Analysts expect mid to high single-digit growth for telecoms verticals within CLSA's coverage universe.

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CLSA noted that global telecom companies largely kept their CY24E capex guidance intact during June 2024 and, historically, there has been a very high correlation between global telecom companies’ capex and Indian IT companies’ telecom verticals’ revenue growth.

Tech Mahindra stock fell around a percent as Tech Mahindra was CLSA’s top pick and an anti-consensus call since January this year. The downgrade comes even as the IT major's stock has risen with a 25 percent so far in 2024, outperforming Nifty IT which has risen 16 percent during this period.

Earlier this week, the company's management cleared the sale of 103-acre land in Hyderabad for a cash consideration of Rs 535 crore. Tech Mahindra will sell the land and buildings, which have an approximate built-up area of 1.26 million square feet spanning over 17 buildings, to Mahindra University. The land is situated at Bahadurpally village, in Hyderabad.

The transaction for the land parcel is worth Rs 535 crore plus taxes, stamp duty, registration fees, conversion charges and such other charges wherever applicable. The amount will be received in tranches, over a period of four years along with interest at 8.2 percent per annum, receivable during the said period

According to an exchange filing, the objective of the sale is to set up Mahindra University as an "autonomous institution that focuses on the betterment of society, one which can continue to grow independently."

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