Shares of Tech Mahindra fell 2.01 percent to close at ₹1,015.30 on BSE on January 31, a day after the IT firm reported a 5.3 percent year-on-year (YoY) fall in its profit at ₹1,296.6 crore for Q3FY23.
Revenue from operations rose 20 percent YoY to ₹13,734.6 crore from ₹11,450.8 crore in the same quarter last year.
The company’s net new deal wins grew 12.9 percent from a year ago to $795 million in Q3 against $704 million in the third quarter of FY22. The attrition rate fell to 17 percent for Q3 against 24 percent a year ago.
The stock has been under pressure in the last one year on concerns over a recession in the West. It is down about 30 percent over a year against a 14 percent fall in BSE IT index and a 2 percent gain in the benchmark Sensex.
Brokerage firms are divided on the prospects of the stock considering the looming macroeconomic headwinds. Most of them have retained their previous views on the stock but tweaked their estimates.
The positive ones
Brokerage firm Emkay Global maintained a ‘buy’ call on the stock with a target price of ₹1,220 and said Tech Mahindra delivered largely in-line operating performance in Q3FY23.
The brokerage firm highlighted that the IT firm witnessed increased cautiousness among clients, leading to delays in decision-making, softness in discretionary spending, and overall tight spending amid macro uncertainties.
Nevertheless, net new deal wins were robust with a TCV of $795mn in Q3, despite a cautious approach by clients and slower decision-making.
Emkay believes extended furloughs in January, the weaker flow of smaller deals, and softness in the top five clients and certain industries like Hi-Tech may weigh on near-term growth.
"We have largely retained our FY23-FY25E EPS (earnings per share) estimates, factoring broadly in-line Q3 performance. We maintain a 'buy' with a target price of ₹1,220 at 16 times Dec-24E EPS," Emkay said.
Brokerage firm Kotak Institutional Equities maintained its ‘buy’ recommendation on the stock with a target price of ₹1,200. It said Tech Mahindra's earnings were disappointing but largely in line with expectations.
"Client-specific issues, furloughs and cut in discretionary spending impacted IT services revenue while BPO performed well aided by seasonality. The revenue decline in top accounts requires further scrutiny. Deal wins were reasonable. Tech Mahindra flexed levers to improve margins, more needs to be done," said Kotak.
"Tech Mahindra is more vulnerable than peers and can get the short end of the stick during a slowdown/recessionary scenario. We tweak assumptions leading to a 1-2 percent cut in EPS estimates. Valuations at 15 times FY2024E earnings already price in expectations of subpar performance. Retain a 'buy' with unchanged fair value (target price) of ₹1,200, valuing the stock at unchanged 16 times Sep 2024E earnings," it added.
Axis Securities has maintained a ‘buy’ call on the stock with a target price of ₹1200.
Axis said Tech Mahindra is sorting out the client-specific engagement for the deal pipeline to remain sturdy. However, rising concerns over the prospects of large economies along with prevailing supply-side constraints pose uncertainties over the company’s short-term growth rates.
HDFC Securities has an 'add' call on the stock with a target price of ₹1,105. The brokerage firm said that Tech Mahindra's underperformance is explained by its growth and profitability underperformance versus peers in FY23E.
"In an environment with industry tailwinds (attrition and cost of delivery normalising), the delta on earnings for Tech Mahindra can also be higher than peers in FY24E. Near-term deterrents of extended furlough in Q4 and limited operating leverage due to account rationalisation and T5 impact limit the upside case," said HDFC Securities.
The brokerage firm has factored in FY23/24/25E dollar revenue growth at 10.6/7.9/8.9 percent, implying Q4FY23E at 1.6 percent quarter-on-quarter (QoQ) and CQGR of 2.2 percent and 2.1 percent for FY24/25E.
The cautious ones
Motilal Oswal Financial Services has maintained a 'neutral' call on the stock with a target price of ₹1,020. It said although Tech Mahindra's current performance remains muted, its 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.
"We expect Tech Mahindra to deliver dollar revenue growth of 10.6 percent in FY23 (including nearly 400bp inorganic impact) followed by nearly 8 percent growth in FY24E, which is among the weakest in our coverage universe," said Motilal Oswal.
"Tech Mahindra should see pressure in FY24 on account of sacrificing growth over margins, softness in its top accounts and a long revenue conversion cycle amid pressure on small deals. We remain on the sidelines on Tech Mahindra as we feel the current valuations fairly factor in uncertainties around growth and margin. We marginally tweak our FY23/FY24/FY25 estimates," the brokerage firm added.
Brokerage firm Nirmal Bang maintained a 'sell' call on the stock with a target price of ₹875.
"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, we still think it is among the weakest of the tier-1 set," said Nirmal Bang.
"Post Q3FY23, we have tweaked our FY24-FY26 EPS estimates modestly and have modestly lowered our target price to ₹875 (12.9 times Sept‘24E EPS, multiple maintained, 35 percent discount to the multiple given to TCS)," 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.
