Investors give a thumbs-up to Tech Mahindra's choice of Gurnani's successor

However, amid high hopes, new CEO Mohit Joshi has his task cut out in improving product mix, margins, deal wins, et al

The market appears to be comfortable with the appointment of Mohit Joshi as CEO cum MD as successor to C P Gurnani In Tech Mahindra. Investors were waiting on this announcement which addresses the looming succession issue.

Joshi is expected to make the switch from Infosys sometime in June 2023, after he serves out his notice period as Head of Global Financial Services & Healthcare and software businesses. He was also responsible for Infosys’s internal CIO function and the Infosys Knowledge Institute. Prior to joining Infosys in 2000, he worked with ABN AMRO and ANZ Grindlays. His two decades-plus of experience in the enterprise technology space allied to his banking experience should enable a smooth transition at TechM.

TechM is a notable leader in the telecom segment (where it originally started with British Telecom as a chief client). It also has a strong presence in auto manufacturing and it is building its presence in financial services and service lines, such as BPO, experience design services and network services. But it is an imbalanced portfolio with high exposures to stressed verticals such as Telecom and Hi Tech. Analysts also consistently rate TechM low on digital competencies compared to peers.

Joshi’s client relationships in the banking, financial services and insurance (BFSI) space should help TechM scale up its BFSI practice. He also has experience at winning large deals that could in general help improve TechM’s large deal win-rates. If he can emphasise on improving digital capabilities, it could be a big boost.

Investors must also reckon with possible churn in top-level management, which could result during the transition phase. In reverse, this is affecting Infosys, where Joshi and Ravi Kumar (who joined as CEO of Cognizant) have exited the company recently.

One view is that if TechM focusses on improved digital capabilities, margins may remain subdued in the medium term (2-3 years) but the topline estimates would rise significantly. The firm has seen falling EBITDA margins in the past fiscal. From an Ebitda margin of about 18 per cent in FY22, it is expected to see a drop to about 15.5 per cent in FY23. Margin recovery may not be very strong in FY24. A decline in headcount of 5 per cent Q3FY23 indicates that it is not seeing a big rise in demand at the least but like most IT firms, it is also seeing reduction in sub-contracting costs. Utilisation of headcount is pretty high at 86 per cent inclusive of trainees.

The market would probably be more enthusiastic if TechM has stronger execution alongside larger deal wins and better digital capability. This means focus on automation and delivery best practices. Some management theorists would also suggest simpler organisational structure and at least one analyst says TechM has been guilty of overreliance on acquisitions, rather than organic building of internal capabilities.

The stock jumped on the announcement to Rs 1,134 (up almost 7 per cent). Target valuations seem to be in the range of Rs 1,160, Rs 1,170 and Rs 1,240 with most analysts raising estimates. However, there’s at least one “Reduce” recommendation with a target valuation of Rs 970.