Attractive valuations! Tech Mahindra can rally of 10%: Kotak Equities

Citing attractive valuation, domestic brokerage Kotak Institutional Equities maintained its Buy rating on IT major Tech Mahindra with a target price of 1,240, signaling an upside potential of 10% from the current market price of Rs 1,130/share.

"M&M Group, in its 3QFY23 earnings call, provided a peek into their thoughts on TechM’s performance. M&M believes there are areas of improvement in both growth and margins at TechM. However, further details on the path to improvement would be revealed only after new leadership is put in place," the brokerage firm said.

Nonetheless, the commentary of little tolerance for underperformance has enthused investors, expecting an improvement in the company’s fortunes, it added.


In Q3FY23, Tech Mahindra's consolidated net profit declined 5.3% year-on-year (YoY) to Rs 1,297 crore. However, its revenue from operations increased 20% YoY to Rs 13,735 crore. Sequentially, the net profit rose about 1% and the revenue by nearly 5%.

In constant currency terms, sales grew 0.2% sequentially and were largely on expected lines. Operating profit, calculated as earnings before interest, taxes, depreciation, and amortization (EBITDA), rose 8% sequentially and 4% YoY to Rs 2,144 crore.

TechM underperformed its larger IT peers on both growth and margins. Despite net new-deal TCV being strong in the $0.7-1.0 billion range in the past eight quarters, organic revenue growth has underperformed larger peers, perhaps due to slippages on execution, Kotak said.

"EBIT margin has moderated to 11.5% over 9MFY23, owing to supply-side pressures in the sector, normalization of discretionary expenses, and operational challenges. These twin challenges are getting the scrutiny of the promoter company, M&M, with a clear focus on narrowing growth and margin differentials with peers," it said.

M&M leadership at its earnings call highlighted that there is a need to improve the performance of TechM but any turnaround is likely to take 1-2 years.

"We do not make any changes to our estimates. Roll forward to December 2024E with a fair value of Rs 1,240, valuing the stock at 16X December 2024E earnings. Attractive
valuations keep us constructive.," Kotak said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)