BackTech Mahindra bridges valuation gap with some peers
A post -result rally has seen Tech Mahindra shares trading at 13.5 times estimated earnings for FY17, as compared to peers HCL Tech at 13.6 and Wipro at 13.2
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Tech Mahindra Ltd’s shares have outperformed the Nifty IT index by around 12% since it announced results in end-October. The firm reported a positive earnings surprise, with the mainstay telecom business growing 2.3% sequentially, after three successive quarters of either flat or negative growth.
Analysts at Jefferies India Pvt. Ltd said in a note to clients, “With company specific issues now behind us and valuations well below peers, Tech Mahindra provides downside protection from macro as well as good visibility for upside."
But it’s interesting to note that after the recent rally, the company trades at 13.5 times estimated earnings for fiscal year 2016-17. Meanwhile, shares of HCL Technologies Ltd have corrected in this period and now trade at 13.6 times estimated FY17 earnings. Wipro Ltd now trades at 13.2 times FY17 earnings.
Ahead of the results season, Tech Mahindra had traded at a meaningful discount to these larger companies. Also note that Infosys Ltd’s valuations have fallen to as low as 15.7 times earnings, which means Tech Mahindra now trades at a discount of only around 10% to Infosys.
While Tech Mahindra’s performance has indeed improved, investors’ excitement may be premature. As Nomura’s analysts had pointed out in a post-results note, in the 12 months till September 2016, Tech Mahindra’s revenues from the telecom vertical, its mainstay business, have fallen by 3%. During the same time, tier-I IT companies have grown revenues from this vertical by 15%. This loss of market share is disconcerting, and if caused by structural issues, can drag growth in the future as well.
Jefferies’ analysts say Tech Mahindra’s growth struggles were limited to top clients, who have now stabilized and are likely to grow. They believe most of the firm’s problems are behind it.
Investors clearly seem to believe this version as well although with hardly any difference in valuations with other large companies, there is now hardly any room for error as far as Tech Mahindra’s performance in the coming quarters go.
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