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Tech Mahindra Shares Gain On Improved Q2 Profit, Cashflow

Margin pressure persists for Tech Mahindra after Q2 results, but 5G offers opportunity, brokerages say.

<div class="paragraphs"><p>Tech Mahindra logo is seen on its office building in Noida. (Photo: Adnan Abidi/Reuters)</p></div>
Tech Mahindra logo is seen on its office building in Noida. (Photo: Adnan Abidi/Reuters)

Shares of Tech Mahindra Ltd. gained after its second-quarter profit and cashflows improved aided by robust deal wins.

The technology company's consolidated revenue rose 3% sequentially to Rs 13,130 crore in the quarter ended September, according to its exchange filing. That compares with the Rs 13,165.5-crore consensus estimates of analysts tracked by Bloomberg.

Tech Mahindra won deals worth over $716 million in the quarter ended September, compared with $802 million in the previous quarter. The IT company has also declared a special dividend of Rs 18 per share, of face value of Rs 5 apiece.

Tech Mahindra Q2 Results: Key Highlights (QoQ)

  • Dollar revenue up 0.3% to $1,638 million

  • Net profit up 14% at Rs 1,285.4 crore

  • Operating profit up 5% at Rs 1,468 crore

  • EBIT margin remained flat at 11%

  • Attrition fell to 20% in Q2 on last 12-month basis.

The stock rose as much as 1.78% during early trading on Wednesday. Total traded quantity is 2.6 times the 30-day average.

Of the 47 analysts tracking the company, 31 maintain a 'buy', 10 suggest a 'hold' and six recommend a 'sell', according to Bloomberg data. The 12-month consensus return potential of the stock is 5.4%.

Here's what analysts made of Tech Mahindra's quarterly results:

Nomura

  • Maintains 'buy' with target price of Rs 1,160, implying a potential upside of 8.3%.

  • Deal wins remain robust but outlook is sketchy.

  • Weak revenue growth and continued margin pressure due to supply side challenges are the key risks.

  • Key levers for margin improvement in the second half of FY23 include better pricing, rising utilisation, rising offshoring and lower sub-contractor costs.

  • Factors FY23 margin of 11.8%. Implied margin for second half of FY23 is about 12.4%.

Motilal Oswal

  • Maintains 'neutral' rating with target price Rs 1,010, implying a potential downside of 6%.

  • Company's high exposure to communications vertical offers a potential opportunity as broader 5G rollout can result in a new spending cycle.

  • Expect company to deliver muted growth in FY23.

  • Values stock at 15x FY24 earnings per share.

  • Expects company to deliver a U.S. dollar revenue growth of 9.7% in FY23.

  • Expects positive commentary on 5G spends to play out in medium term.

  • Expects the company to clock U.S. dollar revenue CAGR of 90% over FY22-24.

  • Flags concern on margin performance in first half of FY23.

  • Expects company to exit FY23 with EBIT margin of 13.2%, which may make it difficult to deliver meaningful margin recovery in FY24.

  • Current valuations fairly factor in uncertainties around growth and margin.

Nirmal Bang Institutional Research

  • Keeps 'sell' rating on the stock with a target price of Rs 889, a potential downside of 17%.

  • Says exit margin guidance of 14% likely to be missed.

  • While net new TCV number is good, some deals seem to have been pushed back because of slower decision making.

  • Tech Mahindra in better position structurally compared to its history in terms of capability mix, large deal win rates, enterprise business strength etc.

  • Demand continues to be robust as of now.

  • Valuations, which are already cheap, could get cheaper due to recessionary demand conditions.