Brokerage firms have expressed mixed views on the stock of Tech Mahindra after the IT player revealed its business plan and growth outlook in its meeting with analysts and investors.
Tech Mahindra held its ‘Investor Day 2023’ on March 3.
The stock has underperformed its sectoral index as well as the benchmark Sensex in the last one year. The road ahead for the stock would significantly depend on the management transition of the company.
Let's take a look at what top brokerage firms say about the stock.
Brokerage firm: Nuvama Wealth Management
The brokerage firm has maintained its estimates with a ‘hold’ call and a target price of ₹1,090.
Tech Mahindra has relatively underperformed peers over the last 6/12 months – in terms of topline and earnings growth, as well as stock performance.
The management focused on upcoming demand/growth drivers in the analyst meeting, but near-term investor focus remains on management transition with CEO C.P. Gurnani retiring on Dec-23.
"We believe any management change can, at best, provide a temporary pop to the stock. Thereafter, the price movement would be determined by earnings growth trajectory – which we believe, would take time to resurrect, given the structural changes the business requires, to be able to compete with peers," said the brokerage firm.
Nuvama expects the stock to underperform (relatively) over the near to medium term. However, inexpensive valuation and high dividend yield may limit the downside potential.
Brokerage firm: HDFC Securities
The brokerage firm has maintained an 'add' call on the stock with a target price of ₹1,140.
HDFC Securities highlighted that there’s an apparent continuity in organic growth focus (versus the acquisition playbook earlier) with less than three quarters remaining for CEO transition.
Tech Mahindra has trailed its peers historically in growth and operational performance. However, in an environment with reducing operational headwinds (cost of delivery, sub-con, attrition), the delta on earnings for Tech Mahindra can be higher than peers in FY24E (high teens growth vs. mid-teens for peers), HDFC said.
The brokerage firm underscored that in any case, drivers such as organic growth focus, synergy extraction from earlier acquisitions and delivery optimisation (sub-contracting & offshoring) will lead to a ‘catch-up’ on the operating profile.
(1) Improved enterprise portfolio supported by prior acquisitions; (2) investments to scale P&P business (USD 450mn to USD 1bn targeted in three years) supported by the refresh of the existing platform (such as Comviva); and (3) an uptick in partnership engagement (expected to drive nearly 40 percent of revenue ahead from about 30 percent currently) will be offset by the near-term macro challenges and translate into an 8.4 percent USD revenue CAGR over FY23-25E for Tech Mahindra, said the brokerage firm.
The announcement about leadership change and higher certainty on margin trajectory can be positive catalysts.
Brokerage firm: Kotak Institutional Equities
The brokerage firm has a 'buy' call on the stock with a target price of ₹1,240.
As per the brokerage firm, Tech Mahindra's focus is on driving organic growth through account mining, large deals, more revenue from alliance partnerships and realizing better synergies from earlier acquired entities.
Connectivity, experience, cloud, engineering, sustainability, products and platforms and co-creation with customers are the key technology bets. The last two will receive higher investments in FY2024. Margin trajectory will improve with a renewed focus on profitability.
"CP Gurnani, CEO of TM, indicated that there will be a reasonable period of transition between him and the succeeding CEO to ensure adequate guidance from the leadership team. Tech Mahindra’s strategies will likely not undergo a huge change due to the CEO change, considering strategies are driven based on key customer inputs," said the brokerage firm.
Brokerage firm: Motilal Oswal Financial Services
The brokerage firm has a 'neutral' call on the stock with a target price of ₹1,023.
The brokerage firm attended Tech Mahindra’s Investor Day 2023; the key focus of the meeting was the upcoming leadership transition and operational profitability.
As per the brokerage firm, the management commentary was encouraging, with a stable spending environment and deal flow in both communication and enterprise businesses.
Tech Mahindra, as per the brokerage firm, continues to focus on improving its profitability and expects FY24 margins to improve, led by lower subcon expenses, improving offshore, and divestment of non-accretive businesses.
With the upcoming change in leadership, due to the retirement of Gurnani (CEO), the long-term strategic direction will continue to remain in focus.
Motilal Oswal said although its current performance remains muted, Tech Mahindra’s high exposure to the communications vertical offers a potential opportunity, as a broader 5G rollout can result in a new spending cycle in this space.
Motilal said the near-term growth remains weak and it awaits greater comfort on margins. The brokerage firm values the stock at 15 times FY24E earnings per share (EPS).
Brokerage firm: ICICI Securities
The brokerage firm has downgraded the stock to a 'reduce' from a 'hold', fixing the target price of ₹971.
The brokerage firm highlighted that the stock price has run up nearly 8 percent in the last one month in anticipation of potential leadership change. Tech Mahindra is now trading at 16 times and 14 times on FY25 and FY26 EPS respectively.
"We downgrade the stock to a 'reduce' (earlier: hold) as we do not expect earnings fundamentals to materially change over the next three years despite potential leadership change (we assume 10.1 percent EPS CAGR over FY23E-FY26E, lowest in our coverage universe) because we believe EBIT margins will likely remain range-bound around 12-13 percent over FY23E-FY26E due to the need to invest in digital capabilities," said ICICI Securities.
"Plus, Tech Mahindra’s wallet share in top-5 clients has been reducing for the past four quarters and this is likely to continue over the next two quarters as well due to an increased level of automation and cost-reduction programmes undertaken by these clients," the brokerage firm added.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
