Tech Mahindra surges 6% as June quarter earnings beat Street estimates

Going forward, analysts expect a ramp up of large deals won in the previous quarters and improvement in deal wins in coming quarters to drive Tech Mahindra's revenues

Shares of Tech Mahindra gained as much as 6 per cent to Rs 702 on the BSE on Tuesday after the company's April-June quarter (Q1FY21) earnings beat Street estimate.

The IT services firm's revenues declined 6.7 per cent quarter on quarter (QoQ) to US $ 1,207.5 million. However, they were above the estimates by analysts and brokerages who had estimated a decline of 8.3 per cent sequentially. The company reported profit before tax (PBT) of Rs 1,283 crore, up 32.9 per cent sequentially. Its consolidated net profit grew 20.9 per cent on a QoQ basis at Rs 972 crore.

Operating margin expanded by 10 basis points (bps) to 14.3 per cent on a sequential basis. New deal wins stood at $290 million during the quarter under review.

Going forward, ICICI Securities expects a ramp up of large deals won in the previous quarters and improvement in deal wins in coming quarters to drive Tech Mahindra's revenues.

“Further, in the long term, we believe its leadership in the communication vertical will make it a key beneficiary of vendor consolidation in the segment. It would also benefit from 5G opportunities. Enterprise segment will also benefit from improved digital traction and success in large deals. Hence, we remain positive on the stock,” the brokerage firm said in results update.

“Understandably, net new deal wins (US$ 290 million) were weaker than the usual run-rate. Despite the elongated decision-making cycles, the company hinted at improving deal pipeline. Revenue and margins are expected to improve from hereon,” Motilal Oswal Securities said in Q1 results update.

The relatively higher client concentration and the resultant impact on pricing and working capital were key concerns initially. However, management commentary suggests that these are not insurmountable. Ramp-up in recently won mega deals was largely on track, a key positive, it adds.

At 09:50 am, the stock was trading 4 per cent higher at Rs 688 on the BSE, as compared to 0.45 per cent rise in the S&P BSE Sensex. A combined 11.3 million equity shares had changed hands on the counter on the NSE and BSE till the time of filing this report.