Shares of Tech Mahindra rallied over 5 percent in early morning deals on Tuesday after the IT major reported better-than-expected earnings for the first quarter of fiscal 2021 that led brokerages to increase the target price on the stock. The IT stock gained as much as 5.77 percent to hit an intraday high of Rs 702.40 on the BSE. At 9:50 am, the shares traded 3.61 percent higher at Rs 688 apiece.

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The company on Monday had reported a net profit of Rs 972.3 crore in the quarter ended June 2020, a rise of 20.9 percent from Rs 803.9 crore in the previous quarter. Net profit came in higher than CNBC-TV18 analysts' poll estimates of Rs736 crore.

Revenue from operations during Q1FY21 dropped 4 percent to Rs 9,106.3 crore from Rs 9,490.2 crore quarter-on-quarter (QoQ). Revenue in dollar terms fell 6.7 percent to $1,207.5 million from $1,294.6 million, on a sequential basis. However, dollar revenue beat CNBC-TV18 estimates by 2.1 percent.

"Despite demand uncertainty and volume reduction, we have been able to demonstrate operational resilience through cost optimization. Cash conversion has been strong, while we aim to improve profitability margins as demand normalises," said Manoj Bhat, Chief Financial Officer, Tech Mahindra.

Brokerages remain bullish on the company's earnings and believe that the margins may improve going ahead.

CLSA

CLSA said that the contours of Tech Mahindra Q1FY21 results were similar to peers with a sharp revenue decline, strong cost control (Ebit margin was stable QoQ at 10.1 percent) and healthy cash generation (FCF was up 55 percent QoQ). Where it fell short was on giving visibility on the trajectory of the recovery: deal wins were relatively subdued ($290 million, down 43 percent QoQ) and historical volatility in its margin limits confidence in the quantum of expansion.

"This could constrain the stock’s incremental moves following a 30 percent rally over the past three months. We adjust our FY21/FY22 EPS estimates by 12 percent / 4 percent and raise our target price to Rs 700 from Rs 570," CLSA said.

Citi

Citi maintained Buy rating with a target price of Rs 800 per share as the company's Q1 EBIT was 11 percent higher than its expectations and expects the company to see margin recovery going ahead. Tech Mahindra's management commentary was cautiously optimistic. The supply-side issues have improved, Citi said. The brokerage raised FY21/FY22 EPS estimates by 3-4 percent and multiple to 15.5x from 14x.

Goldman Sachs

The brokerage also believes that Tech Mahindra's margin may improve on lower travel, facility expenses, higher offshoring and automation. It maintained Buy call with a target price of Rs 763 per share and raise EPS estimates by up to 8 percent on improving growth trajectory.

Motilal Oswal

The brokerage believes that despite the elongated decision-making cycles, the company hinted at improving deal pipeline. Revenue and margins are expected to improve from hereon. Relatively higher client concentration and the resultant impact on pricing and working capital were key concerns initially. However, management commentary suggests these are not insurmountable. Ramp-up in recently won mega deals was largely on track, a key positive, it said.

"We upgrade our EPS estimates over FY21–22E by 17 percent as we revisit our growth and margin trajectory in light of the surprise in 1QFY21 and optimistic commentary," Motilal Oswal said.

The brokerage maintained a Neutral rating and increased the target price to Rs 750.

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