Tech Mahindra declines over 3% post Q3 numbers, pares losses later

Shares of Tech Mahindra dipped 3.5 per cent to Rs 767 on the BSE on Saturday after the company reported 2 per cent growth in its consolidated net profit at Rs 1,146 crore for the quarter ended December 31, 2019 (Q3FY20), on sequential basis. On a year-on-year basis, the numbers declined 5 per cent.

Revenue from operations stood at Rs 9,655 crore, up 6.4 per cent compared with Rs 9,070 crore reported in the September quarter (Q2FY20). In constant currency terms, the revenue grew 4.3 per cent QoQ. In US dollar terms, revenue rose 5.1 per cent to $ 1,353 million.

Earnings before interest, tax, depreciation and amortisation (EBITDA, meanwhile, stood at Rs 1,563 crore, up 4.2 per cent QoQ, while margins slipped by 30bps QoQ to 16.2 per cent.

Tech Mahindra also announced the acquisition of 70 per cent stake in Bengaluru-headquartered Cerium Systems. Cerium will boost the company’s Engineering Services practice in VLSi (Very Large Scale Integration) and Embedded Software, it said in its press release.

Analysts at Elara Capital reiterate ‘accumulate’ rating on Tech Mahindra with a target price of Rs 818 on 15x FY21E EPS of Rs 54.5.

“Telecom growth could recover in FY21, driven by deal wins while enterprise could aid too. Valuation is favorable but re-rating is hinged on consistent execution (remains uneven leading to earnings volatility),” the brokerage firm said in the quarterly update.

“In a weak demand environment, Tech Mahindra surprised by announcing USD 1.2 billion new deal wins (180 per cent plus YoY). In conjunction with the AT&T deal (ramped up in Dec’19), this should translate into strong revenue growth in FY21 (13 per cent, USD),” Motilal Oswal Securities said in a result update.

“Differences in the portfolio mix will likely keep Tech Mahindra insulated from the current weak demand environment within BFSI and Retail. Conscious of the impending margin pressures led by large deal ramp ups, we build in only slight margin expansion (90bp) over FY20-22. This should be led by profitability improvement at portfolio companies and moderation in sub-contractor costs,” the brokerage firm said and reiterated ‘buy’ rating on the stock.

In the past three months, Tech Mahindra outperformed the market by gaining 8 per cent, as compared to a 1.5 per cent rise in the S&P BSE Sensex till Friday.

At 09:51 am, the stock recovered early morning losses partially and was trading 2 per cent lower at Rs 780 on the BSE. In comparison, the benchmark index was up 0.05 per cent at 40,743 points. A combined 797,526 equity shares have changed hands on the counter on the NSE and BSE so far.