Tech Mahindra Ltd. share price target

Recommendation: Given the uncertainty from the world's largest economies, we expect delays in decision-making on IT budgets. Keeping this in view, we recommend a SELL on the stock.

Tech Mahindra posted revenue of INR 1,28,639.0 Mn, down 2.2% QoQ and 2.0% YoY. This is in accordance with market conditions as pressure on discretionary expenditure continues. According to segment performance on a YoY basis, the following were the results for the quarter: Retail Transport and Logistics (8.2% of revenue) saw a 4.6% decline, Communications Media and Entertainment (CME) (37.0% of revenue) saw a 11.5% decline, Manufacturing (17.8% of revenue) saw a 5.7% growth, Technology (11.0% of revenue) saw a 2.8% increase, BFSI (16.1% of revenue) saw a 6.3% degrowth, and Others (10.0% of revenue) reported a 2.8% decline.

We recently upgraded TechM to BUY from Sell (read our report here link). With that, we now delve into and address key ensuing concerns flagged by investors, essentially: 1) Why do we expect margins to revive from Q1FY25 revenue growth from FY26; 2) What are TechM’s capabilities in BFSI? and what opportunities can it tap into to scale up in this vertical?; 3) What is recently appointed COO Atul Soneja’s track record.

Given the uncertainty from the world's largest economies, we expect delays in decision-making on IT budgets. Keeping this in view, we recommend a SELL on the stock.

Tech Mahindra’s (TechM) Q2FY24 result, as expected, was weak on all fronts, including revenue growth and margins. Sequential revenue decline was further exacerbated by weakness in communication vertical globally (where TechM has still very high reliance and which may prove as Achilles heel in Mohit Joshi’s (MD & CEO designate) turnaround efforts at TechM, in our view) and TechM’s conscious efforts to deliberately move out of non-core geographies, clients and service lines.

We believe, EBIT margin improvement is a low hanging fruit for TechM’s new CEO Mr. Mohit Joshi; however, top line revival may take some time. That said, Mr Joshi’s opening gambit (appointment of COO Mr. Atul Soneja and an internal reshuffle) bolsters our conviction for a successful turnaround.