Tech Mahindra drops over 4% after Q1 earnings; brokerages maintain cautious approach, here’s why

Tech Mahindra shares fell more than 4% in early trading on July 27 on BSE, a day after the company reported Q1 2024 results. It hit a low of Rs 1097.25 per share. This stock has fallen for 5 consecutive sessions and is down 12.4%.
Most brokerages downgraded Tech Mahindra Ltd and lowered their price targets after weak June quarter results.
Kotak Institutional Equities downgraded the stock from its additional list and lowered its price target to Rs 1,100 per share from Rs 1,143 per share. Nuvama Research downgraded the stock to a cut and lowered its price target to Rs 1,000 per share from Rs 1,140.
ICICI Securities reiterates its sell rating and price target expectation of Rs 900 per share, down 20%, JM Financial maintains its hold rating and reduces its target price by 7% to Rs 1060 per share.
The IT company reported a weak quarter. Tech Mahindra saw revenue fall 4% in a row to $1,600.7 million. Revenue fell 4.2% in constant currency, making it the steepest decline among peers. Wipro and HCLTech also had lower revenue this quarter. It reported a 38% drop in net profit year-on-year, at Rs 692.5 crore. Brokerage Kotak has cut its EPS estimate by 6-18% for the 2024-26 fiscal year, with the maximum reserved for 2024. The company expects revenue to fall 2.2% in 2022. “. We expect c/c revenue growth of 8.3% and EBIT margin to increase by 300 bps in FY 2025E. However, TM stock has rallied over the past three months despite the highest EPS cut. The stock is fully valued at 17X FY2025E,” the Kotak report adds.
Technology CEO Mahindra and MD CP Gurnani said it was one of the toughest quarters for the company in the past five years. This comes at a time when the business environment is becoming difficult for IT companies, with several large companies cutting their growth forecasts. During this quarter, Tech Mahindra’s new CEO and MD, Mohit Joshi, also joined the board effective June 19. Gurnani is expected to retire on December 19.
While analysts have an optimistic view of new CEO Mohit Joshi, they also recognize the significant challenge he faces in reviving the company’s operations in terms of growth and margins. Any strategy it designs and implements will take time to show results in terms of earnings, which can lead to a period when a company’s stock may underperform against other companies. company in the same industry.
Pre-tax profit margin was 6.8%, down 440 basis points from 11.2% in the previous quarter. Total contract value (TCV) or contracts won by the company was $359 million, compared with $592 million (-39.36%) in the previous quarter and $802 million (-55.24 percent) in the same period. period last year.

“TechM’s weak first-quarter performance, coupled with a weak 2023 exit rate, coupled with meager transaction flows and fragile macros, will likely keep the company’s revenue growth flat in Fiscal year 24 – significantly lower than its peers,” Nuvama said in its latest report. .

Meanwhile, Nomura maintains its buy rating and increases its price target by 15% to Rs 1,316 per share amid cheap valuations and a higher dividend yield of 4.5%.