Read what brokerages have to say about Tech Mahindra’s over 12% rise on 15% EBITA growth projection by FY27

In today’s intraday trading, Tech Mahindra, the fifth-largest IT firm in India based on market capitalization, saw a notable increase of more than 12%, culminating in a share price of Rs 1347. This increase demonstrates the market’s positive response and the company’s faith in its audacious future goals.

 

The company’s modest financial results for Q4 FY24 and the whole fiscal year FY24 were revealed, but the rise still occurs. Tech Mahindra’s financials on Thursday after market hours were below street predictions.

Performance of Tech Mahindra in Q4 of FY24
Its sales fell 6.2% year over year to Rs 12,871 crore in Q4 FY24, while its consolidated net profit saw a steep decrease of almost 41% to Rs 661 crore.

The company’s consolidated net profit for the whole FY24 was reported to have decreased by 51.2% year over year to Rs 2,358 crore. Revenue for the same period was reported to have decreased by 2.4% to Rs 51,996 crore.

Even with the notable drop in profits, Tech Mahindra set high goals for the next three years.With the release of its FY27 vision, management established lofty objectives such as outperforming peers in revenue growth, achieving a 15% EBIT margin by FY27, maintaining a ROCE profile over 30%, and allocating more than 85% of Free Cash Flow (FCF) by FY27.

Motilal Oswal Regarding Tech Mahindra
A local trading business called Motilal Oswal voiced confidence about Tech Mahindra’s restructuring efforts under the new leadership. The brokerage is in favor of the current measures, which include staff investments, SBU right-sizing, investments in top accounts, and the creation of vertical delivery teams.

Though the prognosis is promising, the brokerage is cautious and won’t contemplate a re-rating until it sees clear benefits from the reorganization and redesigned approach. It states that even if the management wants to reach a 15% EBIT margin by FY27, there may not be a major short-term margin increase due to the lack of growth and near-term expenditures.

As such, Motilal Oswal keeps the stock at a “Neutral” rating, with a price objective of Rs 1,210 a share. Additionally, in light of the 4QFY24 performance, it modestly lowers the FY25/FY26 EPS expectations by 0-1%.

Tech Mahindra’s JM Financials
JM Financials recently published a study that included details on Tech Mahindra’s management’s three-year recovery plan. By FY27, the objectives are to expand at a rate above peer average, reach a 15% EBIT margin, and keep the Return on Capital Employed (ROCE) at or above 30%.

The plan comprises investigating cost-saving options, streamlining the organizational structure, creating comprehensive plans for designated investment areas, and carrying out these activities in a reasonable amount of time. Growth potential should be driven by concentrating on high-growth service regions, acquiring major multi-tower transactions, and maintaining top accounts.

Plans for margin growth are bolstered by estimated yearly cost reductions of USD 250 million on average. Reaching this goal seems doable given the company’s current operating margin of around 6% EBIT margin (based on a cost base of USD 5.7 billion).

According to JM Financials, these investment and cost-saving numbers support the company’s aim of a 15% EBIT margin. The study emphasized the organizational structure and important individuals that were already in place, as well as the strategy’s well-defined objectives with quantifiable indicators.

Success would ultimately be determined by implementation, although on paper, JM Financials thought the concept was solid. The three-year schedule gives management plenty of time to implement, which might increase the likelihood of success.

As a result, JM Financials revised the target price from INR 1,320 to Rs 1,430 based on FY27E EPS (20x multiple) discounted at a 12% Weighted Average Cost of Capital (WACC), upgrading the stock to BUY.

Regarding Tech Mahindra, Prabhudas Lilladhar
A number of important factors were emphasized by Prabhudas Lilladhar in his assessment of Tech Mahindra. They pointed out that even while the communications industry, which generates around 36% of the company’s sales, is experiencing poor and erratic demand, Tech Mahindra’s approach to promote a balanced portfolio mix with less reliance on communications is well received.

Nevertheless, the cyclical nature of its portfolio company and shortcomings within its company Units (BUs) continue to provide issues. Prabhudas Lilladhar took a cautious approach, saying they would hold off on developing a positive view of the business until they saw early indications of revival.

Prabhudas Lilladhar has projected financial figures for FY25e and FY26e, indicating 1.8% and 6.0% Year-over-Year (YoY) growth, respectively, based on constant currency (CC) basis. Additionally, they project an adjusted margin increase of 70 basis points (bps) for FY25e and 300 bps for FY26e.

With a target price of Rs 1,135, Prabhudas Lilladhar assigns a Price-to-Earnings (P/E) ratio of 19 times to FY26e, which is now trading at 20 times the projected earnings. They thus begin covering Tech Mahindra with a “HOLD” rating.