Q2FY24 Review: Tech Mahindra: Clean-up continues!

26 Oct 2023 , 11:41 AM

TECHM reported Q2 revenue decline of 2.4% cc QoQ (-5.9% cc YoY); below IIFLe at -0.5%. Telecom (-5.1% QoQ) continued to see the sharpest decline, while Enterprise also remained soft (-1.5% QoQ). Ebit margin fell to 4.7% (-210bps QoQ) — below IIFLe of 5.5% — on revenue decline, investments in freshers and one-off business restructuring costs. Net headcount rose sequentially by 2.3k (+1.6% QoQ), driven by BPO seasonality in Q3. Deal wins picked up to USD640mn (-26% TTM YoY), but remained below the aspired quarterly run-rate. TECHM announced org. restructuring under the new leadership, which will be effective from Jan 1st. TECHM expects the growth to stay subdued in the near term, as it continues to focus away from the non-core areas amid soft discretionary spend. Analysts of IIFL Capital Services reduce FY24-26 EPS by 4-14%, on lower revenue and margin forecasts; they are now 15-30% below consensus. Their 12-month TP reduces to Rs930 (was Rs970), pegged at 15x 2YF EPS. Analysts of IIFL Capital Services forecast TECHM to deliver USD revenue/EPS Cagr of 3%/4% over FY23-26. They reiterate REDUCE as the turnaround may be prolonged, given the macro and portfolio challenges. 

Another weak quarter, led by Telecom: 

Telecom witnessed a decline of 5.1% QoQ. While within Enterprise, Others (-8.5%) and BFSI (-2.7%) were the weakest, manufacturing remained resilient growing 2.1%. The top 5 clients’ revenues declined 7.2% QoQ, sixth-straight quarter of decline. Management expects revenues to remain soft in the near term, due to pressure on discretionary spends and rationalisation of non-core areas. 

Margin hit new all-time low: 

Ebit margins at 4.7% (-210bps QoQ) were below IIFLe of 5.5% led by negative operating leverage, investments in freshers and one-off business restructuring impact (-260bps). Management expects margins to remain subdued in Q3; its business restructuring exercise to result in margin improvement in Q4 and FY25. 

Turnaround still sometime away, given the challenges: 

TECHM’s H1 performance highlights the 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. They maintain REDUCE, since valuations are already pricing in a recovery with little room for error. Key risk: Demand recovery.