Tech Mahindra shares tank 5%; here's why

Shares of Tech Mahindra were in focus on July 27, a day after the company reported its financial results for the April-June quarter of FY24. The share price of Tech Mahindra tanked as much as 5.3% in early trade on Thursday to hit an intraday low of ₹1,082.55 apiece on the BSE, after the company missed profit estimates by a wide margin in Q1 of FY24. In contrast, the broader BSE Sensex was trading 0.06%, or 38.88 points, higher at 66,746.08. 

The scrip opened at ₹1,100, down 3.8% as against the closing price of the previous session at ₹1,144.05. At the time of reporting, shares of IT major were trading 4.72% lower at ₹1,090.25. The market capitalisation of the IT major stood at ₹1.06 lakh crore with more than 2.49 lakh shares exchanging hands as against the two-week average of 0.97 lakh shares.

At current level, shares of Tech Mahindra are trading 14.1% lower than the 52-week high of ₹1,270.35, which the company touched on July 17 this year. The share price is up 10.9% from the 52-week low of ₹982.95, which the company touched on April 28 this year.

Tech Mahindra, a subsidiary of Mahindra Group, reported a 39% decline in its profit to ₹693 crore as against ₹1,131 crore in the corresponding period last year, which was lower than analyst expectations of ₹1,100 crore. The revenue from operations surged 3.5% year-on-year to ₹13,159 crore. Sequentially, however, the revenue declined by 4.1%.

In dollar terms, revenue stood at $1,601 million, down 2% Y-o-Y and 4% quarter-on-quarter (QoQ).

Tech Mahindra's earnings before interest, taxes, depreciation, and amortisation (EBITDA) fell 29% year-on-year to ₹1,338 crore.

The software firm's total headcount stood at 148,297, down by 4,103 quarter-on-quarter.

New deal wins more than halved to 359 during the April-June quarter from 802 in the year-ago period.

The number of active clients fell to 1,255 for the first quarter from 1,262 in Q1 FY23.

Segment-wise, revenue from the communications, media and entertainment (CME) industry dropped 8% year-on-year, while revenue from the banking, financial services and insurance (BFSI) segment fell 5.4%.

While the company has attributed global macroeconomic uncertainty to be a reason behind the decline in Q1 profit, brokerage firms are cautious about the continued pressure on the company's CME segment will likely weigh down on the growth of Tech Mahindra.

Analysts at brokerage firm Motilal Oswal have maintained a 'neutral' rating with a target price of ₹1,080. The brokerage firm has slashed FY24/FY25 EPS (earnings per share) estimates by 8-10% on weak margin and muted outlook.

Analysts at brokerage firm Nirmal Bang have also slashed EPS estimates across FY25-26 on lower revenue, thus implying a 17% downside. According to analysts, the constrained customer spending will weigh on the IT sector and Tech Mahindra. The brokerage firm has maintained a ‘Sell’ call for the stock with a target price of ₹944.

Analysts at ICICI Securities have cut the FY24 EPS estimate by 12% and has maintained a ‘Sell’ rating with a revised target price of 12-month target price of INR 910, implying 20% potential downside.

"Due to the significant miss in Q1, we cut our FY24E EPS estimate by 12%, but largely maintain our FY25E/FY26E EPS factoring-in double-digit revenue growth during the two years with EBIT margin recovering to 12.8% from 11% in FY24E," says the brokerage firm.

"We are 8-10% below Bloomberg consensus estimates on FY25/FY26 EPS due to our lower margin assumptions," it adds.

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