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Tech Mahindra Shares Fall 4% as Brokerages Stay 'Wait-and-See' Approach
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Last Updated: 26th July 2024 - 06:06 pm
Tech Mahindra shares dropped over 4% on July 26, as brokerages took a cautious 'wait-and-watch' stance to see how the company's execution strategy will develop. Both Nomura and UBS highlighted execution risks as a significant concern. Additionally, the company's communication segment experienced a decline due to seasonal weakness in the Comviva business. Despite gradual recovery, Tech Mahindra's operating margins remained among the lowest compared to its peers.
Over the past six months, the Tech Mahindra share price has increased by 11%. It saw a significant surge of over 16% in June and nearly 7% in July.
While Bernstein expressed optimism regarding Tech Mahindra's earnings and future growth, Nomura and Nuvama maintained a more cautious outlook. UBS and Citi Research both upheld their 'Sell' rating on the stock while raising their target prices to ₹1,250 and ₹1,260, respectively.
Acknowledging Tech Mahindra's solid Q1 results and its ability to overcome seasonal challenges, Nuvama still kept a 'Reduce' rating but raised its target price from ₹1,000 to ₹1,200. "TechM's first quarter after Mohit's strategy presentation was decent, overcoming its Q1 seasonality. However, the path to its target is long and challenging."
Nuvama also raised concerns about ongoing issues in the telecom sector, which accounts for 33% of Tech Mahindra's revenue. The firm expects margins to face challenges before benefiting from improvements in the employee pyramid and subcontracting costs.
Nomura maintained a 'Buy' rating with a target price of ₹1,600, anticipating continued margin improvements. The brokerage expects Tech Mahindra to experience a slight revenue decline of 0.5% in FY25 but predicts a rebound with a 6.1% growth in FY26.
UBS considers Tech Mahindra a turnaround candidate but plans to wait for the strategy to unfold before revising its outlook. Citi Research projects 12.5% EBIT margins for FY26 but cautions that significant growth will be necessary to achieve this.
Bernstein has an 'Outperform' rating on Tech Mahindra with a target price of ₹1,390 per share, citing an EBIT margin beat and in-line revenue. Tech Mahindra's EBIT margin increased by 110 basis points QoQ to 18.5% in Q1 FY25, driven by cost-saving efforts under project Fortius and a continued focus on operational efficiencies.
Apart from the telecom segment, which continued to struggle, other sectors such as healthcare and retail experienced growth. However, the decline in the telecom sector narrowed to single digits from a 12.4% decline in FY24 and a sharper 16.5% drop in Q4 FY24.
Tech Mahindra Ltd (TechM) offers IT services and solutions, including digital transformation, consulting, and business re-engineering. Its services encompass strategy and consulting, cloud consulting, digital supply chain, application services, intelligent automation, testing services, performance engineering, engineering services, network services, data analytics, artificial intelligence, and digital enterprise applications.
TechM serves various industries, including banking and financial services, communications, energy and utilities, healthcare and life sciences, insurance, manufacturing, media and entertainment, oil and gas, retail and consumer goods, and travel, transportation, logistics, and hospitality. The company operates in the Americas, Europe, the Middle East, and the Asia-Pacific region and is headquartered in Pune, Maharashtra, India.
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