Tech Mahindra: Turnaround to be gradual

18 Dec 2023 , 10:49 AM

Analysts of IIFL Capital Services met with Rohit Anand (CFO, TECHM) to get an update on the IT demand environment and ongoing transition. Overall, the discretionary spend by clients remains muted and decision-cycles are longer, with limited visibility of a recovery in FY25 as of now. In Q3, furloughs are higher and more widespread than last year, with a potential for them to get extended to early Jan. Margins should pick up from Q4 onwards, as the impact from portfolio rationalisation will be largely behind. However, recovery post that is going to be gradual. With the new organisation structure and leadership hiring in place, building blocks for a turnaround are in place. Analysts of IIFL Capital Services maintain their REDUCE rating with a 12-month TP of Rs930; as analysts of IIFL Capital Services believe that the turnaround may take longer than Street anticipates while the stock is already pricing the same. 

Near-term demand remains muted; little visibility for FY25: 

TECHM continues to experience muted demand environment with elongated decision-making cycles, particularly in its Communications vertical. Presently, there is limited visibility of a significant pickup in FY25. There is broad-based slowdown across verticals, with the exception of Manufacturing (led by Auto/Aero). Q3 is likely to be impacted by higher furloughs that are more widespread than last year. 

One-offs to impact Q3 margins: 

Q3 will continue to be impacted by one-off costs related to portfolio rationalization with limited flow-through into Q4. Post that, margin recovery is going to be gradual driven by levers like optimisation of average resource cost, focus on higher margin geographies and better contract management. TECHM is being selective in deals that they go after, with a focus on profitability. 

All eyes on strategy refresh: 

With Mohit Joshi taking over as the CEO from December 20, key focus is going to the strategy refresh that TECHM undertakes. The new organisation structure has been put in place and most of the hiring for the same is done. While building blocks are in place, analysts of IIFL Capital Services believe the turnaround will be gradual, in the backdrop of a challenging macro environment. Analysts of IIFL Capital Services maintain REDUCE given that the valuations are already pricing in a recovery with little room for error.