Tech Mahindra Tumbles As Weak Earnings Trigger Downgrades

Tech Mahindra shares fell as much as 16.89 percent after its March quarter earnings.

Shubhada Kale @Shubhada93

29 May 2017, 02:53 PM IST

A Stock Broker Talks on a Telephone While Working on his Computer. (Photographer: Chris Ratcliffe/Bloomberg)

Tech Mahindra Ltd. slumped as its quarterly performance missed analysts’ estimates, prompting downgrades and price target cuts from brokerages.

The software developer reported a 300 basis point sequential decline in margins and a 30 percent drop in profit in January to March quarter. Jefferies Group said near-term headwinds could make the margins recovery uncertain, while Morgan Stanley India Company Private Ltd. believes margin recovery is likely to be “only gradual”.

Tech Mahindra shares fell as much as 16.89 percent to Rs 356.6, a level not seen since October 2013.

Here’s what key brokerages had to say:

Jefferies

Rating: Downgrades to ‘Hold’ from ‘Buy’.
Price target: Reduced to Rs 460 per share from Rs 580.

Near-term headwinds including visa costs and rupee strength will make margin recovery uncertain.
Pricing negotiation for a large client impacted operating gains.
Muted commentary and lack of confidence suggests growth skewed towards second half of the financial year 2017-18.
FY18 earnings per share estimates cut by 24 percent, and FY19 EPS cut by 21 percent due to cut in margin and stronger rupee.

Despite the earnings cut, the stock is trading at 12 times FY19E EPS and remains inexpensive versus peers with ownership low, making risk reward evenly balanced.

Jefferies’ Note To Clients

Morgan Stanley

Rating: Downgrades to ‘Equalweight’ from ‘Overweight’.
Price target: Reduced to Rs 455 per share from Rs 500.

Larger-than-expected decline in operating margins due to one-time restructuring costs in network services business.
Pressure on legacy business and appreciation of rupee added pressure.
Margins could fall year-on-year in FY18 due to headwinds including visa fee, wage hikes.
A sharp correction in the stock price may offer an opportunity for long-term investors, but no triggers seen in the near term.

We maintain our revenue forecasts and still expect Tech Mahindra to report one of the strongest organic dollar revenue growth rates in FY2018E among the larger peers.

Morgan Stanley’s Note To Clients

Edelwiess Research

Rating: Maintains ‘Buy’.
Price target: Reduced to Rs 563 per share from Rs 642.

Excluding Lightbridge Communications Corp., business is gaining traction and margins will also improve hereon spurred by higher utilisation, automation and non-recurrence of LCC related expenses.
Expects LCC to take another two to three quarters to bottom out versus earlier expectation.