Tech Mahindra: Building blocks in place but no quick fix

15 Feb 2024 , 01:01 PM

Analysts of IIFL Capital Services hosted Tech Mahindra’s (TECHM) management at IIFL’s Investor Conference in Mumbai. TECHM is currently focussed on formulating a long-term strategy to drive sustainable growth. With the senior leadership hiring largely behind us, the building blocks are in place. However, the near-term demand environment remains soft, with limited visibility of growth acceleration in FY25. Margins have bottomed out and the initial low hanging fruits are likely to take margins back to double digits. Post that, improvement is likely to be driven by more structural changes, which are likely to be gradual. Analysts of IIFL Capital Services maintain their SELL rating on the stock as they believe that the turnaround may take longer than the Street anticipates. 

Focus on longer-term sustainable growth strategy: 

TECHM is in the process of formulating a long-term strategy to drive sustainable growth, rather than looking for a quick fix. The new organization structure has been put in place and the leadership transition completed with most of the senior hiring done. The incentive and KRAs for the employees are going to be aligned with the overall strategy of the company, leading to a change in the culture of the organization. TECHM will announce its strategy refresh in April along with further details during the Q4 results. 

Near-term demand environment remains subdued: 

TECHM continues to see muted demand for discretionary spends; however the deterioration is behind us. Within verticals, management believes Communication has bottomed out, but recovery will be gradual; structural changes in BFSI are likely to drive sustainable growth; healthcare has significant opportunities to grow; Manufacturing (driven by Auto and Aero) is likely to lead growth; while Hi-tech is likely to take the longest to rebound. Overall FY25 growth is likely to remain below longer-term average. 

Margins to improve, but structural changes to be gradual: 

TECHM believes its Ebit margins (normalized at ~7% in Q3) have bottomed out. There are certain low hanging fruits, which should take margins back to double digits. However, beyond that, improvement will require structural changes like reducing Average Resource Cost through increased fresher hiring, integration of portfolio companies, offshoring, improving productivity and automation in fixed price projects. Given the investments required to drive the strategy, the improvements are going to be gradual.