Tech Mahindra, India’s fifth-largest IT company by market capitalization, experienced a remarkable surge of over 12% in today’s intraday trading, reaching Rs 1347 per share. This upsurge indicates the market’s optimistic reaction and highlights the confidence in the company’s ambitious future plans.
The surge comes despite the company’s modest financial results released for Q4 FY24 and the full fiscal year FY24. Post-market hours on Thursday, Tech Mahindra’s financials fell short of street estimates.
Tech Mahindra Performance in Q4FY24
In Q4 FY24, its consolidated net profit witnessed a sharp decline of nearly 41% to Rs 661 crore, while revenue declined by 6.2% year-on-year to Rs 12,871 crore.
For the full FY24, the company reported a consolidated net profit decrease of 51.2% year-on-year to Rs 2,358 crore, with revenue standing at Rs 51,996 crore, marking a 2.4% decrease over the previous fiscal year.
Despite the significant profit decline, Tech Mahindra outlined ambitious objectives for the next three years.The management unveiled its vision for FY27, setting ambitious goals to outpace peers in revenue growth, attain a 15% EBIT margin by FY27, sustain a ROCE profile exceeding 30%, and allocate over 85% of Free Cash Flow (FCF) by FY27.
Brokerages on Tech Mahindra
Motilal Oswal On Tech Mahindra
Motilal Oswal, a domestic brokerage firm, has expressed optimism regarding the restructuring efforts at Tech Mahindra under new leadership. The brokerage views recent initiatives positively, including SBU right-sizing, investments in top accounts, the establishment of vertical delivery teams, and employee investments.
However, despite the positive outlook, the brokerage remains cautious and awaits tangible improvements from the restructuring and revamped strategy before considering a re-rating. It notes that despite the management’s target of achieving a 15% EBIT margin by FY27, the absence of growth and near-term investments may impede significant margin improvement in the short term.
Consequently, Motilal Oswal maintains its ‘Neutral’ rating on the stock, with a price target of Rs 1,210 apiece. Additionally, it slightly adjusts FY25/FY26 EPS estimates downward by 0-1% following the 4QFY24 results.
JM Financials on Tech Mahindra
In a recent report, JM Financials provided insights into Tech Mahindra’s three-year turnaround roadmap presented by its management. The outlined goals include achieving above-peer-average growth, attaining a 15% EBIT margin, and maintaining a 30%+ Return on Capital Employed (ROCE) by FY27.
The strategy entails detailed plans for identified investment areas, optimizing the organizational structure, exploring cost-saving opportunities, and implementing these initiatives within a realistic timeframe. Growth prospects are expected to be fueled by top accounts, securing large multi-tower deals, and focusing on high-growth service areas.
Margin expansion plans are supported by targeted average cost savings of USD 250 million annually. With the company currently operating at approximately 6% EBIT margin (based on a USD 5.7 billion cost base), achieving this target appears feasible.
JM Financials noted that these cost-saving and investment figures align with the company’s goal of a 15% EBIT margin. The report highlighted the strategy’s well-defined deliverables with measurable metrics, along with the already established organizational structure and key personnel.
While execution will ultimately determine success, JM Financials deemed the plan robust on paper. The three-year timeline suggests ample opportunity for management to execute, which could improve the probability of success.
Consequently, JM Financials upgraded the stock to BUY, revising the target price to Rs 1,430 from INR 1,320, based on FY27E EPS (20x multiple) discounted at a 12% Weighted Average Cost of Capital (WACC).
Prabhudas Lilladhar on Tech Mahindra
In an evaluation of Tech Mahindra, Prabhudas Lilladhar highlighted several key points. They noted that despite weak and unstable demand within the communications sector, which contributes approximately 36% of the company’s revenue, Tech Mahindra’s strategy to drive a balanced portfolio mix with reduced dependency on communications is viewed positively.
However, challenges persist due to the cyclicality of its portfolio business and weaknesses across its Business Units (BUs). Prabhudas Lilladhar expressed a cautious stance, stating they would wait for early signs of recovery before adopting a positive outlook on the company.
In terms of financial projections, Prabhudas Lilladhar anticipates revenue growth of 1.8% and 6.0% Year-over-Year (YoY) on a Constant Currency (CC) basis for FY25e and FY26e, respectively. They also expect margin improvement (adjusted) of 70 basis points (bps) and 300 bps for FY25e and FY26e, respectively.
Currently trading at 20 times the estimated earnings for FY26e, Prabhudas Lilladhar assigns a Price-to-Earnings (P/E) ratio of 19 times to FY26e, with a target price of Rs 1,135. Consequently, they initiate coverage on Tech Mahindra with a ‘HOLD’ rating.
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