Bank Of America Merrill Lynch Cuts Tech Mahindra’s Target Price Citing Margin Worries
Bank Of America Merrill Lynch cut the target price on Tech Mahindra stock to Rs 380 from Rs 415 earlier.
Tech Mahindra Ltd.’s margin concerns have surfaced yet again on estimates of "sluggish earnings" despite promises to improve the cost structure, according to a report by brokerage firm Bank of America Merrill Lynch (BofAML).
It has reiterated the ‘Underperform’ rating, and lowered the target price to Rs 380 from Rs 415 earlier, citing the four-quarter sequential decline in net profits. The full-year impact of deterioration in the financial year 2016-17 and the slow growth in the telecom segment initiated the downgrade, the report added.
The brokerage firm has also lowered its earnings per share (EPS) estimates by 4 percent for the current financial year and by 8 percent for the next year.
The company is looking to prune its costs after its net profit took a hit for four consecutive quarters and plunged more than 30 percent in the January to March quarter.
On June 22, Tech Mahindra spoke of its plan to cut costs by optimising employee, research and development, and general expenses. These measures could improve margins by 100 basis points, the report said.
Competitive Positioning In Telecom
“An increasing topic of focus for investors has been Tech Mahindra's competitive positioning in telecom, given that growth in this vertical was slower than peers in FY17,” said BofAML.
The brokerage firm said that the margin is likely to 'show a dip' in FY18 as the company looks for revenue growth in the telecom sector where the operating leverage is limited.
The Bull Case
The fifth generation (5G) technology roll-out by telecom companies and increased offshoring of work could help the company push up its revenue growth in the segment above the current expectation of 5-6 percent year-on-year, according to the report.
The company gained entry into two-three large U.S. telecom companies and further seeks to increase its presence both in the U.S. and globally. It continues to gain wallet share with large existing customers, said the report.