Tech Mahindra stock, which has fallen by about 30 percent so far in 2020, could see another bout of selling as most brokerages slashed target prices after a muted performance in March quarter.
Some analysts have also downgraded the stock to ‘sell’.
Tech Mahindra March quarter results were below analysts 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.
The company posted a net profit of Rs 1,132.5 crore in the corresponding period of the previous fiscal and Rs 1,145.9 crore profit in the December quarter of FY20.
EBIT for the quarter came at Rs 949.6 crores and the margin was 10 percent. EBIT was 17.9 percent below, while margin was 180 bps below CNBC-TV18 estimates.
Revenue from operations stood at Rs 9,490.2 crore, down from Rs 9,654.6 crore reported in the December quarter. However, it was up from Rs 8,892.3 crore reported in the March quarter of FY19.
Also Read: Tech Mahindra's profit falls 29% YoY; proposes a final dividend of Rs 5
"Tech Mahindra posted weak results as profit fell by 29 percent YoY. EBIT margin was a big miss too. Telecom is a very important business mix for the company which has a positive outlook due to higher consumer spending in telecom & data," Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.
"We believe that the entire IT space will go through transformation post-COVID-19, and with respect to Tech Mahindra as most companies have delayed their 5G CAPEX that could impact the telecom revenue for the stock. We are downgrading forecast and outlook on the stock,” he said.
We have collated views from various experts and brokerage houses on Tech Mahindra post-March quarter results:
Expert: Umesh Mehta, Head of Research, Samco Securities
The pandemic and consequent lockdown in India and across the globe has disrupted the IT industry which will impact Tech Mahindra’s revenue as well. It would be advisable to 'sell' Tech Mahindra as there are other large players which can provide better-investing opportunities going forward.
Expert: Ashish Chaturmohta, Head of Technical and Derivatives, Sanctum Wealth Management.
COVID-19 led disruptions are bringing extraordinary changes in the business models of the IT industry. Hence, it will be important to see who all are able to adapt to the rapid changes.
While the stock has corrected 35 percent over the last two months, it is not expected to rally in the near term in absence of any strong triggers.
Brokerage Firm: Motilal Oswal downgrades the stock to Neutral
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 was 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 resultz and downbeat commentary.
Brokerage Firm: Edelweiss Securities Ltd reduced target price to Rs 640
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.
Tech Mahindra reported below estimate Q4 FY20 numbers. Revenue at fell 4.3 percent QoQ and EBIT margin came at 14.2 percent (down 200bps QoQ) versus 15.8 percent estimate.
Margin contraction was due to higher employee costs (up 80bps) and SGA expense (up 120bps). Revenue dip was largely led by a sharp 9 PERCENT fall in telecom vertical.
“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.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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