Amid a slew of downgrades and "Sell" ratings; Nomura is positive on Tech Mahindra, TP set at Rs 1,316

Tech Mahindra Q1`Results Review: Tech Mahindra disappointed the Street with its June quarter (Q1FY24) financial results as the tech major delivered poor performance on all fronts, be it revenue, deal wins, margins, or PAT. While the Street had already factored in a soft quarter for the IT companies, Tech Mahindra's performance has been so dismal that a number of brokerages and analysts have straightaway assigned a "Sell" rating to the stock. The company has posted the weakest set of numbers among the Tier-1 IT services companies.

ICICI Securities, in its Q1 review report, said, "TechM reported the weakest set of numbers for Q1FY24 with a) an order book of $359 million, down 40 per cent QoQ and 55 per cent YoY; b) USD revenue decline of 4 per cent QoQ and 2 per cent YoY due to 9 per cent QoQ decline in its largest vertical (communications), and c) the lowest EBIT margin (since Dec 04) at 6.8 per cent (8.2 per cent after adjusting for a one-time provision of USD 23 million related to client bankruptcy).

The brokerage added that with no near-term visibility of sharp demand recovery, a soft order book, and a bleak demand outlook for the communications vertical due to discretionary and 5G spend cuts, it is now forecasting 0.1 per cent CC YoY growth for TechM in FY24E.

"Due to the significant miss in Q1, we have cut our FY24E EPS estimate by 12 per cent, but largely maintain our FY25E and FY26E EPS, factoring in double-digit revenue growth during the two years, with EBIT margin recovering to 12.8 per cent from 11 per cent in FY24E," it added. 

Tech Mahindra reports disappointing Q1 numbers; net profit falls 38% to Rs 692.5 crore

The brokerage has a "Sell" rating on the stock with a target price of Rs 910. 

Nirmal Bang Securities, which has been bearish on the stock and the overall IT sector, for more than a year now, reiterated its sell call. Foreign brokerage Citi has also given a sell call on the stock with a target price of Rs 900. 

However, among the deluge of downgrades, cuts in target prices, and sell calls, CLSA and Nomura have maintained their positive stance on the Pune-headquartered company. CLSA has given an "Outperform" rating on the stock with a target price of Rs 1,120, while Nomura has a "BUY" call with a target price of Rs 1,316.

In its rationale, Nomura said that Q1 was a big miss, but it has likely bottomed out. Analysts at the brokerage note that demand moderation will weigh on growth in FY24. It further said that Q1 revenue missed estimates due to sharp weakness in the telecom vertical. It has revised the FY24–25 earnings per share (EPS) by 3–10 per cent.

Tech Mahindra's share price

At the time of writing this copy, the stock was trading 4.70 per cent lower at Rs 1,090.25 on the BSE. In the past three months (till July 26 closing), the stock has rallied 13.96 per cent, Trendlyne data show.