IT services company Tech Mahindra's earnings were far below analysts' expectations. The Mahindra Group company reported Q4FY23 revenue of $1,668 million (+) 0.3 percent constant currency (CC) quarter-on-quarter (QoQ), (+) 6.3 percent CC year-on-year (YoY), ahead of estimated (-)0.6 percent CC QoQ decline. EBIT margin of 11.2 percent (-) 80 basis points QoQ is lower than Street’s forecast of 11.5 percent/12 percent. TCV too is weak at $592 million (-) 26 percent QoQ, (-) 42 percent YoY, while attrition eased to 15 percent as against 17 percent in the last quarter.

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Shares of Tech Mahindra rallied 1.77 percent to trade at Rs 1,020.90 apiece on Friday. The stock was up 2.62 percent in the last one week and a little over 1 percent on a year-to-date basis.

"We reckon FY23’s low exit rate, seasonal Q1 weakness, weak deal flow and weak macros are likely to keep TechM’s growth below-industry average in FY24," said brokerage Nuvama Institutional Equities in a research note.

The brokerage has cutting its FY24/25E earnings per share (EPS) by 5 percent/6 percent on lower growth/margins. This along with a rollover to 15 times FY25E price–earnings (PE) (from 16 times FY24E) yields a target price of Rs 1,070 from Rs 1,090 earlier. Nuvama has retained its ‘Hold' rating on the stock.

Following the new CEO announcement, TechM’s stock price movement would be determined by its earnings growth trajectory. That, as per the brokerage, would take time to resurrect given the structural changes that the business requires. Inexpensive valuation and a high dividend yield limit downside potential, it said.

“Tech Mahindra earnings are far below our expectations. We were expecting around 13-14 percent margins but it is quite a big miss. We were not expecting a single digit margin at this point of time but it may be due to lower volumes and higher onsite expenses,” said Omkar Tanksale, Senior Research Analyst at Axis Securities.

TechM Q4FY23 performance

The IT firm reported a 26 percent decline in consolidated net profit at Rs 1,118 crore for the quarter that ended on March 31, 2023 as challenging macro-economic conditions prompted clients to tighten spending. However, its revenue rose 13 percent to Rs 13,718 crore in Q4FY23.

TechM's board has also recommended final dividend of Rs 32 per equity share of Rs 5 face value i.e., 640 percent of the face value for the financial year ended March 31, 2023, subject to the approval of members of the Company at the forthcoming Annual General Meeting.

The final dividend, if approved, will be paid by August 11, 2023. This dividend is in addition to special dividend of Rs 18 per share paid as interim dividend in November, 2022. The total dividend for FY23 will be Rs 50 per share on par value of Rs 5 each i.e. 1,000 percent.

CP Gurnani, Managing Director & Chief Executive Officer, Tech Mahindra, said: “As we step into FY24, we see the increasing need for businesses to stay agile by leveraging next generation technologies. We are strongly focused on helping our customers stay competitively dominant and relevant in the era of fast evolving market conditions by helping them adapt to leaner and sustainable business models.”

Rohit Anand, Chief Financial Officer, Tech Mahindra, said: "Our strategy of prudence and operational excellence helped us through the uncertainties of FY23. We continue to return cash to shareholders through a consistent dividend policy. We move into the next fiscal, with sharper focus on productivity improvements, cash & value creation for our stakeholders."

First Published:Apr 28, 2023 9:09 AM IST