Tech Mahindra Q4 review: Here's what top domestic brokerages have to say

Tech Mahindra on April 27 delivered largely a disappointing performance for the quarter that ended March 2023 (Q4FY23). Revenue stood flat QoQ at $1,668 million (0.3 per cent CC QoQ), driven by CME (1.8 per cent), while Enterprise declined by 0.7 per cent QoQ. EBIT margin declined 80bps QoQ to 11.2 per cent. Revenue growth was led by CME (0.7 per cent in USD), Manufacturing (1.5 per cent), BFSI (0.3 per cent), and Others (2.7 per cent), while Retail, Transport and Logistics declined 10.4 per cent sequentially. Among geographies, Europe led the growth, at 3.5 per cent QoQ, while Americas and RoW declined 0.3 per cent and 2.9 per cent, respectively. Net new deal wins came in at $592 million, lower than the previous quarters, reflecting a cautious approach by clients considering macroeconomic uncertainties.

Let's take a look at what top brokerages have to say about the stock -

ICICI Securities

Tech Mahindra's EBIT margin miss in Q4FY23 was due to higher investments to future-proof the business. This, we believe, is a reflection of its weak capabilities and investments around partnerships with hyper scalers and multiple SaaS platforms. Top five client revenues have seen a sharp ramp down over the last one year, it being down 20 per cent YoY during Q4FY23 which is again a reflection of weak execution by TechM, in our view. 

We see TechM to have significantly weak revenue growth in FY24E at 4 per cent in constant currency terms on the back of cautious demand commentary, weak Q1FY24 and soft order booking. Post Q4FY23 result, we lower our EPS estimates by up to 3 per cent on account of lower revenue growth and EBIT margin assumptions. We are significantly below street EPS estimates due to lower margin assumptions and a weak revenue growth profile for TechM. Since mid-Feb’23, TechM (flat) has significantly outperformed NIFTY IT (down 10%) amidst high expectations from the new CEO. However, we believe the earnings growth momentum at TechM could remain weak given the higher investments required in digital capabilities. We maintain our REDUCE rating on the stock with a revised (lower) 12-month target price of Rs 927, implying an 8 per cent potential downside.

Emkay Global

Management expects growth to remain soft in H1FY24 and anticipates improvement in H2FY24, based on its conversations with clients. Increasing offshoring, pyramid rationalization, structural actions to divest non-profitable businesses, and optimising sub-contracting cost remain the levers for margin expansion in the medium term. We have cut our EPS estimates for FY24/25 by 7.3-13.7 per cent to factor in the Q4 miss and lower margin assumptions. Considering inexpensive valuations and a ~5% dividend yield, we retain our Buy rating on the stock with a TP of Rs1,170 at 16x Mar-25E EPS (earlier Rs 1,270).

YES Securities

Overall, it reported mixed performance for the quarter, with Q4FY23 revenue in line with estimates; while EBIT margin came in below expectation. It has highlighted near terms concerns due to increasing macroeconomic risks. We currently have ADD Rating on the stock. Trades at PE of 13x on FY25E

IDBI Capital

Going forward, we expect H1FY24E to remain subdued due to delays in decision-making, delays in deal conversion and a slowdown in demand due to macro uncertainty. The company’s deal wins are also down 26 per cent QoQ & 41 per cent YoY to US$592 million. Hence, we have revised our revenue estimates downwards by 1.8 per cent in FY24E. In addition, we believe the company’s aspiration of 14-15 per cent margins seems difficult in the near term due to demand pangs. Hence, we have lowered our EPS estimates for FY23E & FY24E by 10.7 per cent and 6 per cent. As a result, we maintain our HOLD rating on the stock with a revised target price of Rs 1,110 (15x FY25E EPS).