 "Tech Mahindra Q4: Stock zooms 13% as management eyes 'turnaround' in FY25")
Shares of Tech Mahindra surged over 13 per cent to Rs 1,344.95 on the BSE in Friday's intra-day trade on strong management commentary.
The management announced its vision for the financial year 2026-27 (FY27), with goals to outgrow peers in revenue growth and achieve earnings before interest and tax (Ebit) margin of 15 per cent by FY27. It also aims for a 30 per cent plus return on capital employed (ROCE) profile and expects to return >85 per cent of free cash flow (FCF) by FY27.
The management indicated that FY25 will be a year of turnaround followed by stabilisation in FY26 and strong returns from FY27.
The management is confident of improvement in year-on-year (YoY) growth starting Q1FY25 and alluded Q4FY24 as a low point for Tech Mahindra. The growth should accelerate in H2FY25.
The focus will be on scaling large accounts, winning multi-tower deals, driving synergies from past acquisitions, improving the cost structure, and achieving profitable and predictable growth. The management aspires to be among the Top-3 IT services companies in terms of margins beyond FY27.
“As we step into FY'25, we look forward to improvement in clients spending, which fuels our optimism for a better revenue performance ahead. Our unique ability to enable customers with transformative scale at unparalleled speed, differentiates us from competitors,” Mohit Joshi, Chief Executive Officer and Managing Director, Tech Mahindra, said.
The management plans to utilise various margin levers to achieve targeted 15 per cent EBIT margin in FY27 which include – operational parameters (pyramid, subcon, offshore mix, utilisation, overheads), productivity, focus on high margin business, delivery excellency and synergies with portfolio companies, Motilal Oswal Financial Services said in Q4FY24 result update.
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Though restructuring efforts are in the right direction and FY27 strategy is in place, investors will await the results on account of these efforts before we see any material rerating in the name, the brokerage firm said.
Tech Mahindra’s performance in the fiscal year was impacted by weak macros and the new CEO Mohit Joshi after taking the helm has started implementing structural changes to begin the recovery journey of the company.
Against this, here's how key brokerages interpret the IT company's Q4 results:
ICICI Securities
ICICI Securities
Tech Mahindra’s performance in the fiscal year was impacted by weak macros and the new CEO Mohit Joshi after taking the helm has started implementing structural changes to begin the recovery journey of the company.
The CEO has set an ambitious roadmap of Vision 2027 for the company wherein it is aiming for predictable revenue growth & improving margins. The CEO mentioned that it expects the company to achieve an Ebit margin of 15 per cent by FY27 & revenue growth higher than the peer group for which it will be making investments each fiscal year.
The roadmap set by the new CEO is ambitious and the execution will be over a longer period whose results will be gradual.
Nuvama Institutional Equities
Key risks for Tech Mahindra include delay in telecom spends that can impact estimates meaningfully; high exposure to Europe, which may affect growth; currency appreciation; and substantial cut in US technology budgets, particularly in digital.
"We are trimming FY25E/26E by -2 per cent/-1.5 per cent. We continue to rate Tech Mahindra ‘Reduce’ with an unchanged target price of Rs 1,000, valuing the stock at 16x FY26E PE,” said Nuvama.
Emkay Global
"We believe ambitious FY27 goals and capital allocation would support valuations, while execution of the strategy will drive a sustained re-rating of the stock,” Emkay said in a note.
Analysts cut FY25E/26E EPS by 15 per cent/6 per cent based on Q4 results and the newly unveiled strategy. While retaining ‘Add’ on TechM, with revised down target price of Rs 1,350 at 19x Mar-25E EPS.
Motilal Oswal
Weak Q4FY24 exit and headwinds in key verticals like communications, will remain a drag on FY25 revenue growth, analysts noted. "In FY25, we expect the company to post one of the lowest growth rates among peers at 4.1 per cent Y-o-Y US dollar CC before improving to 10.2 per cent in FY26E," the Mumbai-based brokerage said
Furthermore, the improvement on account of restructuring and revamped strategy would be keenly watched out for before any re-rating.
Though the management targets to reach 15 per cent Ebiit margin by FY27, absence of growth and near-term investments should prevent material improvement in near-term margins.
"We remain on the sidelines as we feel the current valuation fairly factors in the uncertainties around growth and margin. We trim our FY25/FY26 EPS estimates by 0-1 per cent post 4QFY24 results. We remain Neutral on the stock with a TP of INR1,210 (18x FY26E EPS)," the brokerage said in note.