Tech Mahindra shares test Rs 1,100 level; brokerages suggest up to 21% potential downside

Shares of Tech Mahindra Ltd on Thursday extended their fall for the fifth consecutive session. The stock today settled 3.82 per cent lower at Rs 1,100.30. It has lost 9.22 per cent in the last five sessions. The recent weakness in the share price came after the IT firm reported a drop in quarterly profit. Tech Mahindra posted a 39 per cent fall in its first-quarter profit (Q1 FY24) to Rs 693 crore. The company's margins on earnings before interest and tax (EBIT) declined to 6.80 per cent from 11 per cent a year earlier.

Axis Securities has assigned a 'Sell' rating on the counter for lower target price of Rs 995. "In Q1 FY24, Tech Mahindra reported revenue of Rs 13,159 crore, down 4.10 per cent on a QoQ basis. While it posted a growth of 3.50 per cent on a YoY basis (in CC terms), it stood below our expectations," the brokerage stated.

"Revenue growth guidance for FY24 will be high single-digit in CC terms. Margins are likely to expand in the near term. From a long-term perspective, we believe Tech M is sorting out the client-specific engagement issues on the verticals front and the deal pipeline remains sturdy. However, rising concerns over the prospects of large economies along with prevailing supply-side constraints pose uncertainties over the company’s short-term growth rates," it further mentioned.

The domestic brokerage saw uncertain demand environment due to the potential threat of recession from the world's largest economies, rising subcontracting cost and cross-currency headwinds as key risks.

Choice Broking has downgraded its rating to 'Underperform'. It has given a one-year downward target price of Rs 870, suggesting a potential drop of 20.93 per cent.

The company remains cautious due to delay in discretionary approval cycle, however, H2 is expected to stay agile and find recovery. Customer-focused approach and emphasis on leveraging Gen AI technologies are likely to be the growth drivers of the company. The management is confident of overcoming challenges and headwinds and is well positioned to emerge out of the global downfall. We have suitably altered our forecasts downwards and have downgraded our rating to 'Underperform' to value the stock at a multiple of 15x (unchanged) Sept24E EPS to arrive at a target price of Rs 870," it stated.

"TechM reported new net deals stood at $359 million, significantly down 55.20 per cent YoY and 39.40 per cent QoQ. This drop in deal wins indicates a slowing revenue momentum," Choice further said.

However, it pointed out that TechM has a robust pipeline of opportunities across all geographies, verticals and across all service lines. The IT firm was chosen by a major US retail player for Service desk management, utilising Al and transformative bot-first technology with integrated quality automation, it added.

"The company is in the process of reducing sub-contracting costs to below 10 per cent (currently 14 per cent) of revenues in coming quarters. Also, pyramid structure optimization, improving off-shoring and divesting non-strategic portfolios are identified as margin improvement levers by the management," Choice stated.

At today's closing price of Rs 1,100.30, the stock was down 13.38 per cent from its 52-week high of Rs 1,270.35, a level seen on July 17, 2023. Yet, it was up 11.94 per cent from its one-year low price of Rs 982.95, hit on April 28 this year.

On technical set up, the stock traded higher than the 100-day and 200-day moving averages but lower than the 5-day, 20- and 50-day moving averages. The counter's 14-day relative strength index (RSI) came at 37.53. A level below 30 is defined as oversold while a value above 70 is considered overbought. The company's stock has a price-to-earnings (P/E) ratio of 30.95 against a price-to-book (P/B) value of 4.42.

The scrip has an average target price of Rs 1,109, Trendlyne data showed, suggesting a potential upside of just 1 per cent. It has a one-year beta of 1.11, indicating high volatility on the counter.