Q1FY24 Review: Tech Mahindra: A perfect storm!

27 Jul 2023 , 01:23 PM

TECHM reported Q1FY24 revenue decline of 4.2% cc QoQ (-0.9% cc YoY), significantly below IIFLe at -2.7%. Growth nosedived in Telecom (-9.5% QoQ), while Enterprise also declined (-0.4% QoQ). Ebit margin crashed to 6.8% (-440bps QoQ), below IIFLe of 10%, on revenue decline, wage hikes, provision for doubtful debts and Comviva seasonality. In Q1, net headcount decreased for a third straight quarter by 4.1k sequentially (-2.7% QoQ). At USD359mn (-25% TTM YoY), deal wins were weak. TECHM expects growth to remain subdued in the near term due to macro uncertainty, and recover from H2. Analysts of IIFL Capital Services reduce FY24-26 EPS by 11-14%, on lower revenue and margin forecasts and they are now 15-23% below Consensus. Their 12-month TP reduces to Rs900 (was Rs1,000), pegged at 15x 2YF EPS. Analysts of IIFL Capital Services forecast TECHM to deliver 3% USD revenue Cagr and flat EPS over FY23-25. They reiterate REDUCE as they believe the turnaround may be prolonged, given the macro and the portfolio challenges. The stock is already pricing in the recovery in growth profile, trading at 20x FY25 on their estimates. 

Growth pangs in Telecom: 

Telecom witnessed a sharp decline of 9.5% QoQ, while within Enterprise, BFSI (-2.9% QoQ) was the weakest, while Manufacturing saw a growth of 2% QoQ surprisingly. At USD359mn (-25% TTM YoY), deal wins for the quarter were also weak. Top 11-20 clients’ revenues declined by 14.5% QoQ, while top 10 fell for the fifth straight quarter. Mgmt suggested that revenue decline may have bottomed out and expects recovery in H2 once the deal wins start picking up again. 

Margin declines to all-time low: 

At 6.8% (-440bps QoQ), Ebit margins were below IIFLe of 10%. This was led by negative operating leverage, wagehike impact, visa costs, provision for doubtful debts and Comviva seasonality despite another 2.7% QoQ decline in headcount (10% decrease in past 3 quarters). Management expects margins to normalise through FY24. 

Turnaround may take time given the challenges: 

TECHM’s Q1 performance highlights execution challenges for the new CEO, given the tough macro. Hence, Analysts of IIFL Capital Services believe the turnaround may take longer than the Street anticipates. Analysts of IIFL Capital Services maintain REDUCE, since the valuations are already pricing in a recovery with little room for error. Key risk: client-specific issues.