Tech M hits over 2-month low on disappointing Q2 results; analysts bearish

ICICI Securities believes key will be how new CEO (from December, 2023) pivots the business to more diversified from current Communication heavy construct ahead

Shares of Tech Mahindra slipped 5 per cent to Rs 1,089 on the BSE in Thursday's intraday trade after the information technology companyreported a weak set of numbers for the quarter ended September (Q2FY24) with its net profit plummeting 61.6 per cent year-on-year (YoY) to Rs 494 crore. Sequentially net profit was down 28.7 per cent.

The stock hit its lowest level since July 31, 2023. At 09:44 AM, it was quoting 3 per cent lower at Rs 1,107.60 as compared to 0.96 per cent decline in the S&P BSE Sensex.

Tech Mahindra's revenue stood at Rs 12,864 crore, down 2 per cent YoY and QoQ. According to a consensus estimate of analysts by Bloomberg, it was expected to report Rs 13,244 crore in revenue and Rs 799 crore in net profit.

In constant currency terms, the revenue was down 2.4 per cent quarter-on-quarter (QoQ) to $1,555 million in Q2FY24. The weakness was primarily caused by a continued slowdown in Communication Media & Entertainment (CME), which was down 4.9 per cent QoQ, and BFSI, which was down 2.8 per cent QoQ. The earnings before interest tax (Ebit) margins at 4.7 per cent were down 206 bps QoQ given the negative operating leverage. The total contract value (TCV) stood at $ 640 million driven by large deals.

Analysts at Nomura believe the impact of portfolio restructuring and weak demand will weigh on growth and margin in the second half of the fiscal year and hence, FY24 as a whole. The brokerage firm expects Dollar revenue decline of 4.6 per cent YoY in FY24 (lowered by 290bp) and Ebit margin of 6.2 per cent (-520bp YoY in reported basis).

Weakness in the key Communications vertical, along with an internal restructuring exercise (deprioritising a few business lines and non-strategic accounts), led to another notable decline in Tech Mahindra's revenue performance (-5.9 per cent YoY in CC) in Q2FY24.

The management expects this pain to continue in the Communications vertical, especially in relation to 5G-related investments.

With weakness in the BFSI sector and the need to rationalise low-margin accounts, analysts at Motilal Oswal Financial Services anticipate that the company will experience a decline in FY24, before returning to growth in the following year.

Although its Q2FY24 performance was weak, Tech Mahindra's high exposure to the Communications vertical offers a potential opportunity, since a broader 5G rollout is likely to result in a new spending cycle in this space. Near-term growth remains weak and we await greater comfort on margins, MOFSL said in a result update.

"The near-term demand challenges remain due to reduction in discretionary spends including in key segments. We believe key will be how new CEO (from December, 2023) pivots the business to more diversified from current Communication heavy construct ahead," ICICI Securities said in a note.