Tech Mahindra Shares Gain On Improved Q2 Profit, Cashflow
Margin pressure persists for Tech Mahindra after Q2 results, but 5G offers opportunity, brokerages say.
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.