LIC-Backed Bluechip IT Stock Has A Potential Upside of 22%: Do You Own?

Tech Mahindra is a large-cap IT giant which has rallied over 26% on a YTD basis so far in 2023 and has outperformed NIFTY IT (17%) on a YTD basis. Despite weak results over the past three quarters, the research analysts of ICICI Securities are bullish on the LIC-backed scrip and have maintained a target price of Rs 1,552 with a buy rating which implies a potential upside of 22% from the current market price.

"TechM (28%) has outperformed NIFTY IT (17%) on a YTD-basis despite showing weak results over the past three quarters. From our recent discussion with TechM management, we believe that EBIT margin can improve to ~15- 16%, i.e. by ~500-600bps over FY24-26 vs. Street's estimate of 13.2% in FY26. However, mired by soft demand in the telecom vertical and weaker capabilities in other verticals, top line revival will take some time. We assume 10%/13.3% YoY CC revenue growth for FY25e/26e. Our EPS estimate increase of 10%/24% rides largely on the back of stronger ~200/300bps FY25/26 EBIT margin boost," said the research analysts of ICICI Securities.

"We increase our target multiple to 20x (prior: 14x) as the first few steps in turnaround efforts by Mr. Joshi instils confidence given the: 1) appointment of COO Mr. Atul Soneja; and 2) internal re-shuffling of responsibilities (Link). 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," they further stated.

"We believe, EBIT margin improvement is a low hanging fruit for TechM's new CEO Mr. Mohit Joshi; however, top line revival may take some time. That said, Mr Joshi's opening gambit (appointment of COO Mr. Atul Soneja and an internal reshuffle) bolsters our conviction for a successful turnaround. On balance, we also take cognizance that this is contingent on improving capabilities and filling white spaces in non-communication verticals, which should start reflecting in deal wins and market share gains. TechM's valuation looks stretched on consensus' estimates. But, Mr Joshi's initiatives playing out could form a strong premise for the stock to re-rate structurally. Given the backdrop, we increase our target multiple to 20x (earlier: 14x) and upgrade TechM to 'BUY'," they said in a note.

Tech Mahindra Valuation

Commenting on the valuation of Tech Mahindra, Sumeet Jain and Aditi Patil the two equity research analyst of ICICI Sec said "TechM'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. We value TechM on 20x one-year-forward EPS (Q5-Q8 EPS) of INR 78 to arrive at TP of INR 1,552 (prior: INR 910), implying ~20% potential upside. With this, we upgrade TechM to 'BUY' (prior: 'SELL')."

Tech Mahindra Share Price

On Wednesday, the shares of Tech Mahindra were trading lower at Rs 1277 after opening at Rs 1274.95. The stock clocked a 52-week-high of Rs 1,319.95 on (22/09/2023) and a 52-week-low of Rs 982.95 on (28/04/2023).

Tech Mahindra Shareholding

During Q1FY24, the company recorded promoters shareholding of 35.15%, FIIs stake of 25.69%, DIIs stake of 26.86%, Govt stake of 0.17%, and public stake of 12.11%. During the April to June 2023 quarter, insurance giant LIC held 9,23,03,270 shares in the company which is 9.47% of total paid up capital of the company.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.