Investors stay unconvinced about Tech Mahindra’s recovery
While the revival in Tech Mahindra’s telecom vertical is heartening, investors seem to be waiting to see if the improvement will sustain
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Tech Mahindra Ltd’s shares have risen by about 3% since it announced results last week. It was a rare instance of an Indian IT company reporting a positive earnings surprise. Revenue grew by 1.5% in dollar terms, after adjusting for incremental revenues from acquisitions, according to Nomura Research. This was ahead of the 0.8% analysts were expecting, on an average.
For some, such as analysts at Kotak Institutional Equities, the beat on the revenue front was far higher. They had estimated organic revenue growth of just 0.3%. Much of the surprise came from the mainstay telecom business, which grew 2.3% sequentially, after three successive quarters of either flat or negative growth.
While the revival in the telecom vertical is heartening, investors seem to be waiting to see if the improvement will sustain. After all, Tech Mahindra’s valuations continue to languish at less than 12 times estimated earnings for fiscal year 2016-17, and are at a huge discount to other large IT companies.
Nomura’s analysts point out in a note to clients, “Our key concern is why Tech Mahindra is seeing a revival in telecom so late versus Tier-1 IT, for which telecom and media is the fastest-growing vertical at 15% y-y growth in constant currency terms in 2Q versus -3% y-y at Tech Mahindra and is it a case of: 1) Tech Mahindra losing share or 2) client specific or concentration issues or 3) the portfolio having a lower skew towards transformational work.”
Even so, the company’s overall performance in the September quarter should reassure investors. For instance, its top five clients grew for the second straight quarter after six quarters of sluggishness. Besides, deal wins were fairly strong.
Margins fell by 50 basis points, although this was on expected lines because of the full quarter impact of acquisitions and a one-off restructuring cost. A basis point is 0.01%.
While all this is good and the stock’s cheap valuations are compelling, that alone may not entice investors. If the improvement in performance continues in the December quarter, some investors may bite.