Tech Mahindra falls 5% on weak Q2 earnings: Should you still buy?

Shares of Tech Mahindra fell on Thursday after it reported a sharp fall in its net profit in the Sept quarter (Q2FY24). It also failed to meet street expectations on both profit and revenue. Further cuts in target prices and earnings estimates by various brokerages also kept the sentiment negative.

Pranati Deva
Updated26 Oct 2023, 09:33 AM IST
Shares of Tech Mahindra fell on Thursday after it reported a sharp fall in its net profit in the Sept quarter (Q2FY24). It also failed to meet street expectations on both profit and revenue. Further cuts in target prices and earnings estimates by various brokerages also kept the sentiment negative.
Shares of Tech Mahindra fell on Thursday after it reported a sharp fall in its net profit in the Sept quarter (Q2FY24). It also failed to meet street expectations on both profit and revenue. Further cuts in target prices and earnings estimates by various brokerages also kept the sentiment negative.(Bloomberg)

Tech Mahindra reported a weak set of results yet again. Shares of the IT major fell almost 5 percent on Thursday after it reported a sharp fall in its net profit in the September quarter (Q2FY24). It also failed to meet street expectations on both profit and revenue.

Further cuts in target prices and earnings estimates by various brokerages also kept the sentiment negative.

The stock lost as much as 4.6 percent to its intra-day low of 1,089.

The firm reported a 61.1 percent year-on-year (YoY) fall in Q2FY24 consolidated net profit at 505.3 crore versus 1,299.2 crore. Sequentially, the net profit was down 28.18 percent. In Q1FY24, the net profit of the company was 703.60 crore.

Meanwhile, Its Q2FY24 consolidated revenue from operations declined 2 percent YoY to 12,863.9 crore in Q2FY24 against 13,129.5 crore in the year-ago period. Its revenue was mainly dragged by the Communications, Media and Entertainment (CME) and BFSI segments. On a quarter-on-quarter (QoQ) basis, the revenue for operations was down 2.20 percent.

In the US dollar terms, the company's revenue came at 1,555 million, down 5.1 percent YoY and 2.8 percent QoQ (quarter-on-quarter). The company’s EBIT margin or operating margin came in at 4.7 percent, which is worse than the previous quarter’s 6.8 percent.

Segmentwise, barring Manufacturing (up 5.7 percent YoY) and Technology (up 2.8 percent YoY), revenue of all key segments dropped on a YoY basis. Revenue of the Communications, Media and Entertainment (CME) vertical dropped 11.5 percent YoY while the Banking, Financial Services and Insurance (BFSI) segment's revenue fell 6.3 percent YoY.

The company's net new deal wins (TCV) in the quarter also declined to $640 million against $716 million YoY and $359 million in Q1FY24.

“For the second half of the year, our deal pipeline is very strong. There could be reasons for long closures of deals, but that’s the nature of the business. I’d have loved to finish strong—this is the last quarter where I’m at the front seat. I’m mighty proud of what we have achieved since we went public in 2016. At the same time, I do know that in this quarter, I’m reporting a negative growth rate and a drop in margins. But, I am confident about the future despite this decline," said the company’s CEO and Managing Director CP Gurnani.

Long-standing chief executive officer and IT industry veteran C.P. Gurnani is expected to retire and hand over the reins to Mohit Joshi, who had a 22-year stint and was one of the two presidents at Infosys.

The company also announced an interim dividend of 12 per equity share of face value of 5 each.

Brokerage views

Most brokerages were cautious on the IT major and expected weakness in earnings to continue in FY24. Many brokerages have also reduced their earnings estimates and target prices on the back of the weak Q2 results.

Motilal Oswal: The brokerage has retained its neutral call on the stock with a target price of 1,040, indicating a downside potential of 9 percent.

"Tech Mahindra (TECHM) reported another quarter of weak performance, with revenue declining 2.4 percent QoQ in constant currency (CC) to $1.6 bn, which missed our estimate of a 1.1 percent decline. Management expects this pain to continue in the Communications vertical, especially in relation to 5G-related investments. With weakness in the BFSI sector and the need to rationalize low-margin accounts, we anticipate that the company will experience a decline in FY24 (MOFSLe at -4.6 percent YoY), before returning to growth in the following year. Our estimates indicate a flat FY23-25 USD revenue CAGR of 1 percent," said MOSL.

While MOSL expects a potential benefit to come from the overhaul exercise,it also believes that the firm will take time due to macro headwinds and limited opportunities to participate in the transformation initiatives. Although its 2QFY24 performance was weak, TECHM’s high exposure to the Communications vertical offers a potential opportunity, since a broader 5G rollout is likely to result in a new spending cycle in this space, added MOSL

"We are staying on the sidelines because we believe that the current valuation adequately accounts for the uncertainties surrounding growth and margin. We reduce our FY24/FY25 EPS estimates by 2-10 percent due to sluggish growth and a subdued outlook. Near-term growth remains weak and we await greater comfort on margins," it predicted.

Choice Broking: The brokerage has an underperform call on the stock with a target price of 810, indicating a downside potential of 29 percent.

Although there is a healthy pipeline for H2, the company remains cautious as the deal conversion cycles are taking a long. The new structure will help to focus on top client accounts as they have deep domain expertise in the telecom and Manufacturing sectors with emerging capabilities in BFSI, Healthcare and Retail sectors. We have introduced FY26E and arrived at a revised target price of 810, said the brokerage.

Nuvama: The brokerage has a reduce call on the stock with a target price of 980, implying a potential downside of 14 percent.

"TechM’s weak H1, on both revenue and margins (even after accounting for exceptional expenses), leaves much to be desired. It is likely to post revenue contraction and a sharp fall in margins in FY24. We are cutting FY24E/25E EPS by 23 percent/11 percent on lower growth/margins. This along with a valuation rollover to average of FY25E and FY26E PE yields a TP of 980 (earlier 1,000)," it stated.

While the brokerage remains optimistic about the new CEO Mr Joshi, it believes that he has a tall ask ahead of him to resurrect TechM’s performance on growth and margins. Any strategy that he implements shall take time to show up in earnings and in that period, the stock is likely to underperform peers, added Nuvama.

Nirmal Bang: The brokerage has an accumulate call on the stock with a target price of 1,229, indicating a potential upside of 8 percent.

"TML delivered a second consecutive weaker-than-expected quarter, both from a revenue growth and EBIT margin perspective. The weak performance of CME and BFSI verticals will continue into 3QFY24 too but may not impact 4Q. We expect the reported EBIT margin in 3QFY24 to be around 4.7 percent of 2QFY24 and then improve significantly from 4Q and beyond and go back to the FY19 number of 15 percent in FY26. We continue to believe that the worst on the US macro front is ahead of us, and customer spending will remain constrained. Hence, we are cautious on the IT sector and TML’s revenue prospects in FY24/FY25. Post 2QFY24 we have cut EPS estimates across FY24-FY26 on lower revenue and margins (especially in FY24). We reiterate ‘Accumulate’ on TML with a lower target price (TP) of 1,229," noted the brokerage.

Kotak Institutional Equities: The brokerage had retained its reduce call on the stock with a target price of 1,150, implying almost nil upside.

"TechM is rationalizing business and internal operations visible through recent measures. These are necessary and beneficial in the long term but extract a toll on near-term financials due to the upfront costs involved. Sharp revenue and margin miss are driven by one-offs from the termination of non-core business, made worse due to client-specific issues in the telecom vertical and weak discretionary spending. The pain will continue in the December quarter as well. We cut FY2025-26 revenue estimates by 5-6 percent and EBIT margin by 0-60 bps, leading to EPS cuts of 5-11 percent. We value the stock at an unchanged 17X multiple, leading to an FV of 1,150 ( 1,210 earlier)," stated the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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News in Numbers

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₹295 Cr

$23 B

$65 M

3.36%

$65.47 B

$2.5 M

₹80 Cr

1.4%

₹773 Cr

₹2,705 Cr

₹1 Cr

₹14,370 Cr

₹5.74 T

First Published:26 Oct 2023, 09:33 AM IST
HomeMarketsStock MarketsTech Mahindra falls 5% on weak Q2 earnings: Should you still buy?

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