BackTech Mahindra up 2% on hopes of turnaround in earnings performance
The M&M management expects a turnaround to happen in another couple of years. The comments have aided investor sentiment, considering that Tech Mahindra’s recent earnings performance has largely been lacklustre compared to tier-1 peers
PremiumShares of large-cap IT services provider Tech Mahindra Ltd rose nearly 2% on the National Stock Exchange in Monday's trading session, as hopes of a revival in the company's financial performance led to optimism among its investors.
At its recently held Q3FY23 earnings call, the management of promoter company--the Mahindra & Mahindra Group--acknowledged that there were areas of improvement on both growth and margins at Tech Mahindra. Granular details about how this would be achieved are likely to be revealed only after the appointment of new leadership. The M&M management expects a turnaround to happen in another couple of years. Nonetheless, the comments have aided investor sentiment, considering that the IT giant’s recent earnings performance has largely been lacklustre compared to tier-1 peers.
“TechM has underperformed its larger IT peers on both growth and margins. Despite net new-deal TCV being strong in the US$0.7-1.0 bn range in the past eight quarters, organic revenue growth has underperformed larger peers, perhaps due to slippages on execution," said analysts at Kotak Institutional Equities.
The report added that Ebit margin has moderated to 11.5% over 9MFY23 due to supply-side pressures in the sector, normalisation of discretionary expenses and operational challenges. “These twin challenges are getting the scrutiny of the promoter company, M&M, with a clear focus on narrowing growth and margin differentials with peers," said the domestic brokerage house.
Further, analysts at Kotak are of the view that many senior leaders in large organisations have opted for CEO roles in smaller firms. Since TechM has size, scale and relevance, the challenge will not be in attracting high-profile candidates (in case the company opts for an external CEO), but in picking the right one, as per the Kotak report.
Meanwhile, in the last one year, the Tech Mahindra stock has corrected 18%, in contrast to competitors Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd, which have seen their shares decline 4-9%. Consequently, Tech Mahindra trades at a cheaper valuation to these companies.
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