Tech Mahindra dips 4% as management flags growth moderation, budget cuts

Shares of Tech Mahindra dipped 4 per cent to Rs 996.40 on the BSE in Tuesday’s intra-day trade due to the management’s weak commentary post the Q3FY23 results. Given the tough macro-economic environment, the company is witnessing moderation in growth, slower decision making for projects, cuts in discretionary spending and shrinking budgets for short-term tactical deals, the management said.

Motilal Oswal Financial Services (MOFSL) expect Tech Mahindra to deliver dollar revenue growth of 10.6 per cent in FY23 (including a 400 bps inorganic impact) followed by an 8 per cent growth in FY24E, which is among the weakest in their coverage universe. “Tech Mahindra should see pressure in FY24 due to its focus on growth over margins, softness in its top accounts and a long revenue conversion cycle amid pressure on small deals”, it said.

Tech Mahindra reported a 5.3 per cent fall in its net profit for the December quarter (Q3FY23) at Rs 1,297 crore. Sequentially, profit after tax was up 0.9 per cent. Revenue for the quarter grew 19.9 per cent year-on-year (YoY) at Rs 13,734.6 crore. On a quarter-on-quarter (QoQ) basis, revenue was up 4.6 per cent.

On a constant currency (CC) basis, Tech Mahindra reported a 0.2 per cent QoQ growth for the quarter, while dollar revenue was up 1.8 per cent QoQ to $1668 million aided by currency benefit.

Earnings before interest and tax (EBIT) margin of the company improved by 60 bps QoQ to 12 per cent. The margin improvement was led by restructuring in low-margin assets, increased offshoring and rigorous focus on improving quality revenues. The company won total contract value (TCV) of $795 million during the quarter, up 11 per cent QoQ & 13 per cent YoY.

Tech Mahindra indicated that demand environment has changed meaningfully compared to H1 (April to September) and they are now witnessing delay in decision making in some cases as well as squeezing of budgets in others. The company is also facing similar pattern in their top clients where couple of them are going through restructuring with the business likely to face headwinds from the clients for 2 to 3 quarters, according to analysts at ICICI Securities.

The brokerage believes that total contract value (TCV) win for the next few quarters may see some downward numbers and despite strong TCV wins (net new) in 9MYTD at $2.3 billion, revenue conversion could be a challenge on slower execution. Margin expansion also might not see a linear decline as for some new projects, sub-contractor costs may remain at elevated level and portfolio exit led margin expansion may be delayed by few quarters, it added.

“We remain on the sidelines on Tech Mahindra as we feel the current valuations fairly factor in uncertainties around growth and margin. Although its current performance remains muted, Tech Mahindra’s high exposure to the communications vertical offers a potential opportunity as a broader 5G rollout can result in a new spending cycle in this space,” MOFSL said.