Tech Mahindra share price gained over a percent to hite a fresh 52-high of ₹1,310.80 apiece on the BSE Friday. The stock has rallied more than 27% on a year-to-date (YTD) basis and has sharply outperformed the Nifty IT index that has gained over 14% during the period. The outperformance in Tech Mahindra shares comes despise the company delivering weak results over the past three quarters.
However, analysts believe that the technology major has a huge scope for margin improvement and is likely to see a turnover going ahead.
Brokerage firm ICICI Securities has upgraded its rating on Tech Mahindra to ‘Buy’ from ‘Sell’ and has increased its target price on the stock to ₹1,552 per share from ₹910 earlier.
“We believe, EBIT margin improvement is a low hanging fruit for Tech Mahindra’s new CEO Mohit Joshi; however, top line revival may take some time. That said, Joshi’s opening gambit (appointment of COO Atul Soneja and an internal reshuffle) bolsters our conviction for a successful turnaround,” ICICI Securities’ analysts Sumeet Jain and Aditi Patil wrote in a report.
The analysts believe that Tech Mahindra’s EBIT margin can improve to ~15 – 16%, i.e. by ~500 – 600 basis points (bps) over FY24-26 as compared to Street’s estimate of 13.2% in FY26.
Also Read: Glenmark Life Sciences share price falls 2% as Nirma readies to buy 75% stake in it
However, mired by soft demand in the telecom vertical and weaker capabilities in other verticals, top line revival will take some time.
The brokerage firm assumes 10% and 13.3% YoY CC revenue growth for FY25 and FY26.
“Our EPS estimate increase of 10%/24% rides largely on the back of stronger ~200/300 bps FY25/26 EBIT margin boost,” the report said.
ICICI Securities increased its target multiple to 20x from 14x as the first few steps in turnaround efforts by Joshi instils confidence given the appointment of COO Atul Soneja and internal re-shuffling of responsibilities.
“However, much rests on improving capabilities and filling whitespaces in noncommunication verticals, improving incentive structure for sales, marketing and delivery operations team (yet to be decided by the board). This should start reflecting in deal wins and market share gains for TechM compared to competition,” the analysts said.
On valuations front, they believe Tech Mahindra’s valuation at 19x/17x looks stretched on consensus FY25/26 EPS estimates.
“But should the above steps find implementation under the new management, then the stock carries the potential for a structural re-rating. We are ahead of Street by 7%/16% on FY25/26EPS estimates,” the analysts added.
At 10:30 am, Tech Mahindra share price was trading 1.28% higher at ₹1,309.45 apiece on the BSE.
Catch Live Market Updates here
Download The Mint News App to get Daily Market Updates.
Updated: 22 Sep 2023, 10:37 AM IST