Tech Mahindra takes a knock on disappointing Q3 earnings; should you buy the dip?

Shares of Tech Mahindra traded with a cut of 5.2 per cent at Rs 1,334.55 apiece on the BSE after the IT major’s December quarter net profit slumped 60 per cent on-year to Rs 510.4 crore as against Rs 1,296.6 crore registered during the same period last year. In the September-ended quarter, the company’s net profit was Rs 493.9 crore.

At the day’s low, the stock hit levels of Rs 1,322, a decline of over 6 per cent from the previous closing price of Rs 1407.75.

The company’s revenue from operations took a hit and declined 4.6 per cent to Rs 13,101 crore in the third quarter of the current financial year from Rs 13,734 crore reported in the same period a year ago. Besides, the large-cap IT consulting firm reported a sharp decline in operating profit, with the margin narrowing to 5.4 per cent from 12 per cent in the year-ago period.

Should you buy the dip in the stock post-Q3 show? Here’s what brokerages suggest:

Global brokerage HSBC has maintained its ‘hold’ call on the counter with the target increased to Rs 1300 from Rs 1085. The brokerage is of the view that given the current environment, the turnaround at the company remains challenging even though an experienced team is in place. As for Tech Mahindra, margin expansion is contingent on pyramid improvement or a pricing uptick; both of which are tough to deliver without growth, noted HSBC.

Morgan Stanley has also retained its ‘underweight’ rating on the tech major while raising the target price to Rs 1220 from Rs 1110. The brokerage said that the third quarter may mark bottoming of performance for the tech major. Further, it views the Mahindra Group entity as a good potential turnaround story candidate over the medium term given the management changes & restructuring. Nonetheless, at the same time, it expects sharp downward revisions to consensus estimates in the near term.

Citi remained bearish on the counter, and retained its ‘sell’ on the stock with a target of Rs 1100, implying a downside of around 22 per cent from the last closing price. The brokerage pointed out that the company’s Q3 revenue came in higher than expectations while adjusted Earnings before interest and taxes (EBIT) came in slightly below. Some of the forward looking indicators as per the brokerage are weak total contract value or TCV, declining headcount down 7 per cent on year and 
management commentary.