Tech Mahindra Q4 Results Review - Weak Numbers; FY25 Outlook Remains Muted: Motilal Oswal

Motilal Oswal Report

Tech Mahindra Ltd. reported Q4 FY24 revenue of $1.48 billion, down 0.8% QoQ in constant currency and below our estimate of +0.7% QoQ CC. Communication, media and entertainment remained weak and declined 2.8% QoQ despite a low base.

Enterprise growth was mixed, with retail declining 9.6% QoQ and banking, financial services and insurance growing well at 3.5% QoQ.

Tech Mahindra had another quarter of low profitability, with adjusted Ebit margin at 7.4%, 100 bp below our estimate of 8.4%. Q4 total contract remained weak at $500 million (+31% QoQ/-15% YoY).

The management announced its vision for FY27, with goals to outgrow peers in revenue growth and achieve Ebit margin of 15% by FY27. It also aims for a 30%+ return on capital employed profile and expects to return >85% of FCF by FY27.

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-III IT services companies in terms of margins beyond FY27.

We remain positive about the restructuring at Tech Mahindra under the new leadership and believe the recent steps are in the right direction (i.e., small business unit right-sizing, investment in top accounts, vertical delivery teams and employee investments).

The improvement on account of re-structuring and revamped strategy would be keenly watched out for before any re-rating.

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