scorecardresearchTech Mahindra after Q2: Top brokerages maintain earlier views, remain mixed; here’s what they say

Tech Mahindra after Q2: Top brokerages maintain earlier views, remain mixed; here’s what they say

Updated: 02 Nov 2022, 04:17 PM IST
TL;DR.
Tech Mahindra's revenue for Q2FY23 came in at 13,129.50 crore, up 20.6% YoY over 10,881.30 crore in the corresponding quarter last year.
Tech Mahindra's attrition rate declined to 20% for the quarter from 22% reported in the first quarter of FY23.

Tech Mahindra's attrition rate declined to 20% for the quarter from 22% reported in the first quarter of FY23.

On November 1, Tech Mahindra reported a 4% year-on-year (YoY) decline in consolidated profit after tax (PAT) to 1,285.4 crore for the second quarter of FY23 (Q2FY23).

Revenue for Q2FY23 came in at 13,129.50 crore, up 20.6% YoY over 10,881.30 crore in the corresponding quarter last year.

The attrition rate declined to 20% for the quarter from 22% reported in the first quarter of FY23.

The numbers were below market expectations. On the following day, the stock traded with mild volatility but ended in the green; it opened almost flat at 1,072.95 against the previous close of 1,071.65 and touched the intraday high and low of 1,098.45 and 1,066.25, respectively. The stock closed 0.94% higher at 1,081.70 on BSE.

Brokerages maintain earlier views, remain mixed

Emkay Global Financial Services has maintained its buy rating on the stock with a target price of 1,200 at 16 times Sep-24E EPS (earnings per share), considering “steady revenue growth supported by deal wins and traction in 5G, anticipated margin recovery, and over 4% dividend yield.”

“Tech Mahindra’s Q2FY23 revenue was broadly in line with our expectations, but EBITM missed our estimates. The management of the company remains watchful of macro uncertainties and high energy prices, which may weigh on growth momentum in 2023, even though demand remains resilient so far,” said Emkay.

The brokerage firm pointed out that Tech Mahindra expects furloughs to be marginally higher than usual in Q3.

“Management expects steady margin improvement in the second half of the financial year; however, it remains non-committal to the earlier indicated exit margins of nearly 14%, sighting the possibility of growth moderation and adverse cross-currency movement,” it said.

Emkay has tweaked its FY23-FY25E EPS estimates by -0.8% to 0.3%, factoring in Q2 performance. The brokerage firm highlighted that TechM’s margin performance has been volatile in the past and the pace of recovery remains slower than the management’s earlier guidance.

Kotak Securities has maintained a ‘buy’ on the stock with an unchanged target price of 1,200, valuing the stock at 16 times September 2024E EPS.

Kotak cut revenue estimates to account for the rationalization of low-margin businesses, weak demand indicators and cross-currency headwinds.

“Change in Kotak Institutional Equities economists’ INR/USD forecast cushions impact on margins and leads to unchanged EPS. The stock is cheap, which is the primary reason for our buy rating,” said Kotak.

Motilal Oswal Financial Services has maintained a ‘neutral’ call on the stock with a target price of 1,010. The brokerage firm expects Tech Mahindra to deliver a USD revenue growth of 9.7% in FY23 (including nearly 400bp from the inorganic route), which is among the weakest in Motilal Oswal’s Coverage Universe.

“It should see continued pressure in FY24 as its focus on margin may be at the cost of growth. We continue to expect positive commentary on 5G spends to play out over the medium term on account of growth and monetization uncertainty on the telco side. Tech Mahindra should deliver a USD revenue CAGR of 90% over FY22-24,” said Motilal Oswal.

The brokerage firm is concerned about Tech Mahindra’s weak margin performance in the first half of the current financial year (H1FY23), which makes it unlikely to meet its previous exit margin guidance of 14%.

“With incremental pressure from an adverse operating leverage in the second half, we expect it to exit FY23 with an EBIT margin of 13.2%, which will make it difficult to deliver a meaningful margin recovery in FY24,” said Motilal Oswal.

Brokerage firm Nirmal Bang Equities has maintained a ‘sell’ call on the stock with a target price of 889, citing Tech Mahindra’s Q2FY23 performance fell short.

“Revenue growth in QoQ CC terms of 2.9% was below our estimate of 3.5%, but its EBIT margin came in much lower at 11.4% (our estimate of 12.4%). The latter raises questions on the achievability of its exit quarter guidance of 14%. The revenue growth came in lower as it was impacted by portfolio pruning in the BFSI vertical. Ex-pruning, growth would have been 3.4%,” said Nirmal Bang.

The brokerage firm said while Tech Mahindra is in a better position structurally compared to its history in terms of capability mix, large deal win rates, enterprise business strength, etc., it is among the weakest of the tier-1 set.

“While valuations are cheap, the kind of recessionary demand conditions we are getting into, they are likely to get still cheaper. Post 2QFY23, we have kept our FY24-FY26 EPS estimates constant and have arrived at an unchanged target price of 889 (12.9 times Sept ‘24E EPS, multiple maintained, 35% discount to the multiple given to TCS),” said Nirmal Bang.

Reliance Securities has maintained a ‘sell’ call on the stock with a target price of 980.

“Given margin pressure, lower earnings growth, lower deal wins and higher valuation, we maintain our sell rating on Tech Mahindra with a revised target price of 980, (earlier 965), valuing the stock at an unrevised P/E multiple of 15 times on FY24E earnings,” said Reliance Securities.

YES SECURITIES maintained an ‘add’ rating on the stock with a target price of 1,226 at 15.5 times (unchanged valuation multiple) on FY24E EPS.

HDFC Securities also maintained an ‘add’ rating on the stock with a target price of 1,100 at 15 times Jun-24E EPS (10-year average at 14.5 times).

“While improved pay-out and FCF generation will support the valuation (at 15 times FY24E), the upside is capped for Tech Mahindra,” said HDFC Securities.

Among the global brokerage firm Nomura has maintained a buy call on the Tech Mahindra stock with a target price of 1,160, reported CNBC-TV18. Nomura said the company’s Q2 was broadly in-line and deal wins remained robust.

CLSA, on the other hand, maintained an ‘underperform’ call on the stock with a target price of 1,070, reported CNBC-TV18. CLSA said the company’s Q2 revenue and margin were in-line while the near-term outlook is steady. The margin management remains a challenge for the company but valuation lends support, CNBC-TV18 reported CLSA saying so.

According to a MintGenie poll, an average of 37 analysts have a ‘buy’ call on the stock.

Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.

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First Published: 02 Nov 2022, 01:31 PM IST