Shares of Tech Mahindra declined as much as 7.8 per cent to Rs 503.45 apiece on the BSE on Monday after the company on Thursday posted lower-than-expected numbers for the quarter ended March 2020.
At 10:26 am, the stock was trading over 6.5 per cent lower at Rs 510.25 as against nearly 5 per cent fall in the benchmark S&P BSE Sensex.
The information technology (IT) services company on Thursday missed the profit estimates for Q4FY20 on higher employee costs and a one-time impairment charge even as the company said it was expecting a recovery in demand in the medium term.
The Pune-headquartered firm reported Rs 804 crore in consolidated net profit for the March quarter (Q4FY20), a decline of 29.1 per cent on year-on-year (YoY) basis. Sequentially, it dropped 30 per cent. The company took an impairment charge of Rs 217.5 crore during the quarter for writing off goodwill and non-current assets.
Revenue for the quarter stood at Rs 9,490 crore, a growth of 6.7 per cent YoY, though it fell 1.7 per cent sequentially. In dollar terms, revenues stood at $1,294.6 million, a decline of 3.3 per cent QoQ.
“The Covid-19 pandemic has brought an unprecedented change in the business model for the IT industry. While the demand traction seen through the first three-quarters of FY19-20 has reversed in Q4, we expect that the focus on digital transformation, remote working, and network modernisation will recover in the medium term,” said C P Gurnani, chief executive officer.
The headcount stood at 125,000 at the end of March quarter, up around 4,100 compared to the corresponding period last year.
In a result review note, analysts at ICICI Securities say that they expect Tech Mahindra to see near-term headwinds due to pricing pressure, project ramp downs, client-specific challenges in BPS, and delay in deal signing. However, in the long term, they believe its leadership in communication vertical will make it a key beneficiary of vendor consolidation in the segment. It would also benefit from 5G opportunities. Enterprise segment will also benefit from improved digital traction, success in large deals.
“Hence, we stay positive on the stock due to this coupled with attractive valuation (11x PE on FY22E EPS). Maintain BUY with revised TP of Rs 630 (13x PE on FY22E EPS).”
Edelweiss Securities, too, remain positive on the stock. “We believe TECHM will take a few quarters to stabilise its execution and costs; also, it will take time to return to its deal winning spree, which has been derailed due to the COVID-19 pandemic. Akin to the past, technology will be a big winner from the disruption caused by COVID-19, but the benefits will take time to percolate. We trim our target multiple from 16.0x earlier to 14.5x and roll over to Q2FY22E earnings. We maintain ‘BUY/SO’ with a revised target price to Rs 640.”
Prabhudas Lilladher, on the other hand, notes that the company negatively surprised with a weak set of numbers with revenues and margins significantly below their and street estimates. “TM disappointed with 4.3% revenue decline with core business (telecom) declining by 8.4% QoQ & Enterprise revenue falling by 1.5% QoQ. The revenue decline was sharper at 4.1% on organic c/c basis.”
Adding, “We believe Tech M faced more challenges due to sharp decline in revenue of portfolio companies viz Pininfarina, Target Group and LCC. We believe customers in Network services will hit a pause button as network roll out won’t happen which will impact revenues(LCC) further. We would like to highlight that work from home (WFH) enablement for India-based BPO is lower than 75%, TM has lagged in WFH enablement as compared to peers (non-BPO also). TM hasn’t able to recognize revenues from AT&T deal as we saw revenues from top 5 clients decline by 8.2% QoQ.”
The brokerage has cut its FY21/22 estimates (5-6%), on weak performance and outlook. It values Tech M at 11X earnings of FY22E earnings to arrive at a target price of Rs 478 (earlier: Rs 530). It has “Reduce” rating on the stock.