Tech Mahindra Q4 earnings miss expectations, Street keeps a cautious stance

Tech Mahindra

IT major Tech Mahindra reported a 26 percent decline in consolidated net profit at Rs 1,125 crore for the March quarter of 2022-23, down 27 percent from Rs 1,545 crore a year ago.

Revenue from operations came in at Rs 13,718.2 crore, flat on a sequential basis and up 13 percent on-year. In constant currency terms, revenue grew only 0.3 percent sequentially. EBIT margin for the quarter stood at 9.6 percent against the Street expectations of around 12 percent.

“Tech Mahindra’s EBIT margin miss in the fourth quarter was due to higher investments to future-proof the business. This, we believe, is a reflection of its weak capabilities and investments around  partnership with hyperscalers and multiple SaaS platforms. Top 5 client revenues have seen a sharp ramp-down over the last one year, it being down 20 percent YoY during Q4FY23, which is again a reflection of weak execution by TechM, in our view,” wrote analysts at ICICI Securities, which has given the stock a ‘reduce’ rating at a target price (TP) of Rs 1,003.

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“We see TechM to have significantly weak revenue growth in FY24 at 4 percent CC on the back of cautious  demand commentary, weak Q1FY24 and soft order booking,” they added.

Tech Mahindra’s net new deal wins (TCV) for the quarter stood at $592 million as against $795 million recorded in Q3FY23 and $1,011 million in Q4FY22.

Reliance Securities maintained its ‘sell’ rating on the stock at a reduced TP of Rs 965 from Rs 1,010 earlier, “Management indicated despite current healthy deal wins, higher level of uncertainty, pause on discretionary deals and delay in decision making in US, UK, Germany and few other parts of Europe may impact execution over near to medium term. Management commentary this time was much more cautious and sounding challenging business environment in FY24.”

Although the brokerage expects uptrend in technology spending to continue it believes the industry would record single digit revenue growth, due to global slowdown and deferment on technology spending by few telecom players in US. Moreover, TechM may underperform due to higher exposure to slowing Telecom sector, it added.

Domestic brokerage firm Motilal Oswal maintained its ‘neutral’ stance on the company at a TP of Rs 1,080. “We see muted growth (4.7 percent CC) for FY24, given the low deal wins, poor exit to FY23 and likely weakness in 1HFY24. With macro stabilizing over 2HFY24 and pick up in 5G spends, we are factoring in FY25E USD CC growth of 10.1 percent. Overall, we expect TECHM to deliver 7.8 percent USD CAGR over FY23-25,” it said.

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The brokerage sees potential for performance improvement post the leadership refresh of TECHM in Jun’23, however believes this will take time given the macro headwinds and limited flexibility to invest in growth because of weak current profitability.

While HDFC securities has given an ‘add’ rating to the stock, it has reduced its TP to Rs 1,060 from Rs 1,120 earlier.

The structural improvement in margins over the medium term remains the big catalyst for rerating (low probability currently), it said. “The continued decline in T5 accounts and muted commentary on the communication vertical (TECHM’s largest vertical) by peers remain concerning.”

At 12.37pm, the scrip was trading 1.29 percent up on the National stock exchange at Rs 1,016.05 with sectoral benchmark Nifty IT also trading up by 1.22 percent higher at 27,689.5 points.

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