Tech Mahindra Ltd has set its sights on the future amid the difficult demand conditions facing Indian information technology (IT) companies. It has laid out a three-year roadmap, which includes eventual goals such as clocking better-than-peer average revenue growth by FY27 and attaining an Ebit (earnings before interest and tax) margin of 15%
The company expects FY25 to be the year of turnaround followed by a phase of stabilization in FY26 and finally, reaping the actual returns from FY27.
To achieve its objectives, Tech Mahindra will take several steps, including scaling up capabilities in key markets and service lines, focusing on top accounts, and implementing a cost-optimization programme named Project Fortius, which is expected to yield an average benefit of $250 million annually over FY25-FY27, according to management.
Additionally, the company plans to consistently hire freshers to improve its workforce structure over the medium term. The management also aims to increase its return on capital employed (RoCE) to over 30% and return at least 85% of the free cash flow to investors by FY27.
So far, so good. Investors are excited, taking Tech Mahindra’s shares up more than 10% in early trade on Friday. Broadly, while analysts are upbeat about the strategy, they are also cognizant of the hurdles along the way in achieving success.
“While management’s plan is comprehensive, its execution amidst a weak demand environment carries risk,” said analysts from Jefferies India in a report on 26 April.
Prabhudas Lilladher analyst wrote in a report, “Given the demand within communications (about 36% of revenue) remained weak and unstable, we believe the company’s laid out strategy to drive balanced portfolio mix with reduced dependency on communications is positive.”
The brokerage, which has a ‘hold’ rating on the stock, added: “However, the cyclicality of its portfolio business and weakness across its business units seem to be challenging, hence we would wait for early sign of recovery before we turn positive on the name.”
To be sure, many analysts are cautious on the stock.
Tech Mahindra’s March quarter (Q4FY24) results were nothing to write home about. Revenues were down 0.8% sequentially in constant currency terms. The communications, media & entertainment (CME) vertical stayed subdued with revenue decreasing by 2.8% sequentially despite a low base. Profitability was lackluster with Ebit margin at 7.4%.
Going into FY25, it does not help that the sector’s revenue visibility is bleak due to expectations of weak demand as clients delay their discretionary spending. For Tech Mahindra, in particular, headwinds in key vertical – communications—will act as a drag on FY25 revenue growth.
Motilal Oswal Financial Services expects Tech Mahindra to report one of the lowest growth rates among peers at 4.1% year-on-year in constant current terms before improving to 10.2% in FY26E.
Jefferies India’s analysts expect Tech Mahindra to deliver 5 and 7% constant currency revenue growth in FY26 and FY27, respectively; and expect margins to expand to 12.5% by FY27, 500 basis points higher than FY24 levels.
In short, the near-term path is fraught with challenges and investors would closely watch progress on the company’s roadmap. Despite Friday’s gains, Tech Mahindra shares have been relatively flat so far in 2024, indicating that investors are adequately factoring in growth concerns.