Tech M sheds 9% in 5 days on JP Morgan, Citi downgrades, target price cuts

Tech Mahindra's stock fell 2.6 per to its day's low of Rs 994.55 on Friday after JP Morgan downgraded the stock to 'underweight' from 'neutral', slashing its target price by 10 per cent to Rs 900

Shares of IT major Tech Mahindra (Tech M) succumbed to severe pressure this week following rating downgrades by global brokerages JP Morgan and Citi. 

The stock fell 2.6 per to its day's low of Rs 994.55 on Friday after JP Morgan downgraded the stock to 'underweight' from 'neutral', slashing its target price by 10 per cent to Rs 900. With today’s decline, the stock has shed 8.5 per cent since last Thursday. 

Citing weaknesses and challenges highlighted by TCS, Infosys and HCLTech in their BFSI, telecom, hi-tech, manufacturing and retail verticals, the brokerage said it expects “Tech M to be massively impacted by this trend given its high business exposure (40 per cent to telecom and 10 per cent to hi-tech) to these troubled verticals, which puts its Q4FY23 and FY24 growth and margin at risk.”

It also lowered the rating on Mphasis to underweight citing the same reasons as above. 

The brokerage has reduced its FY24 and FY25 revenue estimates for Tech M by 3 per cent and 5 per cent. The margin estimate has been cut by 40 bps and 60 bps driving 7 per cent/10 per cent cuts to the earnings per share (EPS) for FY24/25. 

This follows Citi’s rating downgrade on the stock to ‘sell’ early this week wherein its cut the target price to Rs 955 from Rs 1,110. 

The brokerage cited further risks to growth in the communications vertical (telecom) and near-term challenges related to discretionary spending cuts and deferrals, vendor consolidation and pricing pressure as reasons for the downgrade.

“While management comments of most companies have sounded cautious on telcos for some time, the headwinds seem to be higher than expected,” it said in the note. 

It added that the positives from the leadership change will also likely take time to play out with risk-reward looking unfavourable for the stock.

That said, for Mphasis, JP Morgan has reduced revenue estimates by 6/7 per cent and a 30-40 bps margin impact for FY24/FY25, respectively. This will drive a 8 per cent and 9 per cent EPS cut over the next two financial years. The target price on the stock has been reduced by 14 per cent to Rs 1,550.