Should you sell Tech Mahindra, Tata Motors?

Here is what top brokerages recommend

Tech Mahindra and Tata Motors lost around 13% and 5%, respectively in intra-day trade after both these companies reported March 2015 quarter numbers that were below analysts’ expectations.

Tech Mahindra reported around 500 basis points (bps) decline in EBITDA (earnings before interest, taxes, depreciation and amortisation) margins at 15.2% during the recently concluded quarter as against 20.2% in the December 2014 quarter. On a sequential basis, the consolidated net profit came in 39% lower at Rs 472 crore.

Tata Motors, on the other hand, reported a consolidated net profit at Rs 1,717 crore for the quarter ended March 2015 (Q4). The drop in the net profit comes on the back of lower-than-expected operating performance at Jaguar Land Rover (JLR) and mark-to-market (MTM) loss provisioning at JLR (on commodity hedges and revaluation of foreign currency debt).
 

So, should you dump these stocks now? Here is what the top brokerages and research houses say:


TECH MAHINDRA


Nomura

Tech Mahindra's results were disappointing on all fronts – revenue, margin and PAT (profit after tax). While most Tier-1 IT companies disappointed on revenue growth in Q4, with misses of 100-300bps on q-o-q constant currency basis, Tech Mahindra disappointed further with a sharp EBIT margin miss of 240bps. We have a Buy rating; our estimates are under review. We continue to prefer HCL Technologies over Tech Mahindra.

IIFL

Notwithstanding growth challenges in next couple of quarters, we expect Tech Mahindra to revert to industry leading growth rate in the medium to longer term aided by a significantly expanded market presence (have added new capabilities through acquisitions). We now expect Tech Mahindra to deliver 20% earnings CAGR over the coming two years on a reduced base (FY15 PAT lower 11% yoy). In?line with the earnings, we have cut our 12?month price target on the stock to Rs 614, valuing the company at 15.5x FY17 P/E. Downgrade rating to ‘Reduce’ from ‘Accumulate’.

Emkay

Management expect weakness in Telecom to continue with some improvement in Enterprise segment in Jun’15 quarter; the management focused on utilisation optimisation and higher offshoring to drive operating margin improvement in near term. We cut FY16/17E earnings by around 24%/15% each to Rs 33/41 respectively. We believe that valuations at around 19.5x/16x FY16/17E P/E are expensive and thereby downgrade the stock to REDUCE, target price Rs 560 (versus HOLD, target price Rs 660 earlier). HCL Tech and TCS remain our positive rated stocks in the Tier I IT Services coverage universe.


TATA MOTORS


Motilal Oswal Research

Tata Motors would benefit from a) recovery in CV business; b) strong product pipeline in JLR especially with launch of baby Jaguar in FY16; c) capacity expansion in JLR and d) commissioning of China JV and engine plant. Our estimates are yet to factor in for the Chery JV, although our target EV/EBITDA of 3.5x for JLR offers cushion for downside due to the JV. Stock trades at 8.2x/6.9x FY16/17E consolidated EPS. We maintain Buy on stock with target price of Rs 647 (sum-of-the-parts based).

Angel Broking

Currently, we have BUY rating on the stock but would review our estimates post interaction with the management.

Emkay

JLR is well set to grow on the back of two launches (XE, F-Pace) which marks its entry into new segments and two major refreshes (Freelander, XF), all in next twelve months. We believe tailwinds from product launches would offset weak demand in China/Europe. The domestic business is coming out of a very challenging phase as M&HCV demand is improving and as the strong product plans in PVs will help revive fortunes in the segment.

We revise our FY16/FY17E EPS lower by around 10% each to factor in (a) lower volumes and inferior mix from a weak Chinese demand (b) higher than estimated  depreciation costs  and most importantly (c) as we factor in equity dilution of around 5% from rights issue. Retain BUY with a target price of Rs 630 (vs Rs 715 earlier) as structural factors remain in favour.