There is much talk about a leadership change at information technology (IT) services provider Tech Mahindra Ltd. The tenure of the current Managing Director (MD) and Chief Executive Officer (CEO) CP Gurnani ends in December. Investors were expecting an announcement related to the new CEO at Tech Mahindra’s Investor Day held on March 3. In anticipation, ahead of the meeting, the stock had climbed 9% in the past month. But those hopes were dashed with no clarity on the matter from the management.
Speculation is rife whether an internal or external candidate will take over as the next CEO. At the Investor Day meet, the management indicated that there would be an appropriate transition period between Gurnani and the successor CEO. Tech Mahindra’s growth strategies are unlikely to see significant changes due to the leadership change as these strategies are based on inputs from key customers, the management said.
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But it needs close tracking. “When a new CEO comes in, growth strategies keep changing. In this case, if the incoming CEO is conservative in his approach, given Tech Mahindra’s underperformance relative to its peers, the Street may not like it, An analyst requested anonymity.
Meanwhile, Tech Mahindra aims to grow its products and platforms business to around $1 billion in the next three years from the current run-rate of $450 million. Also, the management is not eyeing any big acquisitions and aims to drive growth through the organic route. While the company did not share any incremental guidance for FY24 revenue growth or margin, improvements in leverage and offshore including lower subcontract spend will aid margin in FY24. But even with recession risks, the potential downside risks to earnings growth can’t be ignored. “We believe that higher exposure to Tech Mahindra’s stressed verticals (telecom + hi-tech, 50% of revenue) is likely to weigh on FY24 growth. The report by JM Financial Institutional Securities Ltd suggests that lower growth will also drive margin convergence.
Tech Mahindra’s earnings performance in recent quarters hasn’t been impressive compared to its peers.
The report by Nomura Financial Advisory & Securities (India) Pvt Ltd said that Tech Mahindra’s margin profile has historically been weak compared to Tier-1 Indian IT companies. Ltd. This is due to structural reasons including low offshoring levels and high reliance on subcontractors, Nomura added.
Tech Mahindra’s Ebit margin for the nine months ended December stood at 11.5% versus 14.6% in FY12. Analysts said a return to FY2022 levels is likely to be a gradual and multi-year journey.
Investors have taken note. Shares of Tech Mahindra have fallen by around 25% in the last one year, while shares of most tier-1 IT firms have declined at a slower rate.
While the leadership change is an important trigger for the stock, a meaningful revival will depend on the speed at which the company is able to bridge the earnings growth gap with peers. “We believe any management change could provide a temporary pop to the stock,” Nuwama Research said in a report. The report states that the business needs to change in order to be able to compete with peers.
Valuations are not asking. At a FY24 price-to-earnings multiple of 16 times, Bloomberg data shows that the Tech Mahindra stock is trading at a discount to peers. Those looking for a rapid improvement in Tech Mahindra’s earnings performance may be disappointed
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