Tech Mahindra, a prominent player in the IT industry, witnessed a sharp decline in its share price following the release of its Q3 results on January 25, 2024. The company reported a significant year-on-year decline in net profits and decreased revenue from operations, leading to concerns among investors and analysts about its short-term performance.
Key Highlights from Q3 Results
Tech Mahindra’s share price plummeted nearly 7% on the BSE a day after the Q3 results were disclosed.
The net profits for the December 2023 quarter recorded a 61% YoY decline, falling from ₹1,296.6 crore to ₹510.4 crore.
Revenue from operations also decreased by 4% YoY, dropping from ₹13,734.6 crore in Q3FY23 to ₹13,101.3 crore.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) saw a significant decline of 46.5% YoY to ₹1,146 crores.
Challenges and Concerns
1) Telecom Sector Weakness: Tech Mahindra’s key telecom vertical continues to face challenges, with no apparent signs of bottoming out. The company’s reliance on this sector has hindered deal momentum.
2) Booking Decline: Net new deal wins fell from $640 million in Q2 to $381 million in Q3, impacting the order book. The fluctuations and shifting orders added to the challenges Tech Mahindra faced.
3) Margin Focus: The company plans to prioritize margins over revenue in the short to medium term, avoiding sub-optimal deals. However, this strategy has led to a cut in earnings estimates by brokerage firms.
4) CEO Transition: Investors are awaiting the detailed growth strategy from the new CEO, Mohit Joshi, which is expected to be unveiled in April 2024. The market anticipates a three-pronged strategy focusing on sales efficiency, margin enhancement, and increased agility.
Analyst Views and Market Response
Most brokerage firms have retained their views on the stock, with a cautious outlook for the short term.
Nuvama Institutional Equities expressed concern over Tech Mahindra’s weak bookings and the potential challenges in achieving revenue growth and margin improvement.
Valuation and Future Outlook
Tech Mahindra trades at an FY25 price-to-earnings multiple of 23 times, compared to 27 and 25 times for Tata Consultancy Services and Infosys, respectively.
The valuation gap with larger peers will persist until clear signs of sustainable earnings recovery emerge.
Analysts have varied views, with some maintaining a ‘reduce’ call on the stock and others retaining a neutral stance while emphasizing the potential opportunities in the communications vertical.
Summary
Tech Mahindra’s Q3 results reflect the ongoing challenges in the telecom sector and the company’s strategic shift towards prioritizing margins. The market awaits the new CEO’s growth strategy for insights into potential recovery. Investors should remain vigilant, considering the company’s historical struggles with execution and the broader macroeconomic uncertainties.
Disclaimer: We do not endorse or encourage you to take trades or investment decisions based upon our posts/research, all of your trading and investment activities are your own and should be taken through consultation with reputed financial advisors. The analysis posted on this website has been created by involving multiple mediums which are present over the Internet.