In the morning session on April 17, Tech Mahindra Ltd. was down more than 7% after global brokerage firm Citi downgraded the stock to “sell” from “neutral” and decreased the target price to Rs 955 from Rs 1,100.
According to the brokerage, Tech Mahindra was downgraded due to rising threats to growth in the communications sector, which accounts for around 40% of the company’s sales. Recent statistics and comments have raised concerns, causing Citi to issue a warning.
According to the brokerage’s most recent analysis, there are immediate concerns and a negative catalyst watch is already in place, which macroeconomic factors may exacerbate. Operating deleverage may result in lower margins than the market anticipates. Finally, although there are benefits to a change in leadership, they may take some time to manifest.
“In that context, valuations are at 16x 1-yr forward cons EPS – risk-reward looks unfavorable, in our view. We lowered our target multiple to 15x (17x earlier) to factor these risks – new TP of Rs955 (Rs1100 earlier). Our FY24E/FY25E EPS are 7-14 percent below consensus,” Citi said.
So far, IT businesses have had a poor March quarter.
Both Infosys and TCS reported a drop in telecom revenue in the fourth quarter, with -8 percent QoQ in constant currency (CC) and -2 percent QoQ in CC, respectively. Management statements across firms have been cautious about the telecom industry, but the headwinds seem to be sharper than predicted.
At its third-quarter earnings conference, Tech Mahindra said that sales from its top five customers had decreased owing to restructuring at several businesses. Though management anticipated it to stabilise by 4Q, given the macroeconomic uncertainties, the issues might linger.
On April 27, Tech Mahindra is anticipated to release its March quarter results.
Discretionary cutbacks and deferrals, vendor consolidation, and price pressure may all have a negative influence on growth, according to Citi.
Tech Mahindra has identified many margin levers, including lowering subcontracting costs, altering the outsourcing mix, selling off or closing non-strategic operations, applying automation and delivery excellence techniques, and utilising synergies with portfolio firms. According to Citi, the rate of margin improvement in the short term may be slower than projected owing to growth concerns and the possibility of discretionary expenditures returning.
The stock was trading 7.3 percent lower on the National Stock Exchange at Rs 1,007.25 at 9:35 a.m.
