Brokerages await Tech Mahindra new CEO's turnaround plan post Q3; should you buy, sell, or hold?

In the past one year, the stock of this IT services company surged over 31 percent as against 23 percent rise in the Nifty IT index

Tech Mahindra's performance for the October-December quarter (Q3FY24) largely met street expectations but brokerages express concerns about the near-term challenges posed by a demand slowdown within a challenging macroeconomic environment. Despite these uncertainties, market analysts remain optimistic about the company's prospects, eagerly expecting insights into the turnaround strategy from the newly appointed CEO, Mohit Joshi, for the medium-term.

Over the last twelve months, the stock of this IT services company has experienced a notable surge, recording a growth of over 31 percent. This outperforms the broader Nifty IT index, which witnessed a comparatively modest rise of 23 percent during the same period.

Analysts at Nomura shared a 'buy' call for Tech Mahindra, with a target price of Rs 1,470 per share from last close of Rs 1,407, saying that the Q3 financials were above estimates on growth and margins were in-line with their expectations. The brokerage firm awaits full details of new CEO's turnaround strategy in April 2024.

This is the first quarter since new CEO Joshi completely took over reins of the company from former CEO CP Gurnani. Joshi restructured the organisation and the leadership team to turnaround the business, which came into effect on January 1, 2024.

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"The quarter was a mixed outcome. While this dichotomy in the markets will take its own time to settle, we are focusing internally on realigning under the new structure," said the CEO & MD.

Under Joshi's leadership, the reorganisation plan is structured around three key tracks: enhancing sales performance, improving profit margins, and restructuring the internal organisational culture.

Tech Mahindra's net profit fell by 60 percent on-year to Rs 510 crore in Q3FY24 in a seasonally weak quarter plagued by sluggish demand in key verticlas like hi-tech, telecom, and financial services. Net profit, too, saw a decline of 41 percent YoY to Rs 763 crore in Q3FY24.

Meanwhile, the IT services operating margins saw a contraction of 164 basis points (bps) sequentially due to ongoing portfolio restructuring.

Analysts at HSBC shared a 'hold' call on the counter, with a target price of Rs 1,300 per share, sceptical of a turnaround, especially in a tough macro environment. "The margin expansion is contingent on pyramid improvement or a pricing uptick," they wrote in a post result review analysis.

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However, Morgan Stanley analysts were 'underweight' on Tech Mahindra, raising target price to Rs 1,220 per share from Rs 1,100, saying that Q3 may mark bottoming of performance.

"We see the company as a good potential turnaround story candidate over the medium term. However, expect sharp downward revisions to consensus estimate in the near-term," they said.