Rs 12/Share Dividend: Tech Mahindra Stock Nosedives 5% After Weak Q2; Turbulence To Follow In Q3

Investors dumped Tech Mahindra's share price on Thursday leading a free fall so much so by nearly 5%. The sharp selling in Tech Mahindra can be attributed to disappointing Q2 earnings where the company missed revenue and margin estimates. Days ahead seem to be challenging as well and because of this brokerages have refrained from recommending fresh buying in this tech stock. Among the positives will be the Rs 12 dividend per share announcement for shareholders despite weak earnings.

Tech Mahindra's share price nosedived by 4.61% by hitting an intraday low of Rs 1,089 apiece apiece in the early trade on BSE.

At the time of writing, Tech Mahindra shares traded at Rs 1,105.40 apiece, lower by 3.2% with a market cap of nearly Rs 1.08 lakh crore.

Brokerages are recommending between Neutral to Reduce the outlook on Tech Mahindra shares head. Kotak Institutional Equities even expects turbulence to continue in Q3 as well. But there is opportunity in the long run, and hence, Tech Mahindra is expected to bear more pain before making some gains!

Tech Mahindra's Q2 earnings were in deep red with PAT plummetting by a whopping 28.7% QoQ and 61.57% YoY to Rs 493.9 crore, while consolidated revenue from operations also dropped by 2.2% QoQ and 2% YoY to Rs 12,864 crore in the quarter.

In dollar terms, revenue declined by 2.8% sequentially and 5.1% YoY to $1,555 million. PAT plummeted by 29.3% QoQ, and 62.5% YoY to $59 million. EBITDA stood at $129 million, registering a drop of 20.5% QoQ and 47.3% YoY, while Margins were at 8.3%, down 180 bps QoQ.

On Q2FY24 performance, Dhruv Mudaraddi, Research Analyst, StoxBox said, "Tech Mahindra reported a muted performance for the second quarter of the financial year due to a slowdown in key markets especially Europe and Asia and a de-growth in Communications, Media & Entertainment (CME), and Retail, Transport & Logistics verticals. Project ramp-downs due to higher costs for clients and a decline in the discretionary services portfolio put further pressure on the top line. The company disappointed on the EBIT front where the margins contracted due to a 5.8% increase in employee expenses due to restructuring undertaken during the quarter and a significant jump in other expenses. A few one-time expenses in the quarter attributed to the termination of certain services and deals as a part of the restructuring also led to the severe impact on margins."

Further, Mudaraddi added, " Large deal wins in the quarter have been strong, mirroring TCV growth across the industry, which provides some room for growth in the near term. The company has taken several initiatives to consolidate its businesses under broader verticals to streamline and focus on margin improvement in the near future. The developments made by the company in ARVR technology and generative AI, and the proactive establishment of 5G infrastructure will prove beneficial going forward."

Having a Neutral opinion of Tech Mahindra, Motilal Oswal pointed out that although its 2QFY24 performance was weak, TECHM's high exposure to the Communications vertical offers a potential opportunity, since a broader 5G
rollout is likely to result in a new spending cycle in this space.

During Q2FY24, Tech Mahindra took a hit in revenue across industry levels with the exceptions of manufacturing and technology. It recorded de-growth across geographical regions. On industry-wise, revenue in Communications, Media and Entertainment (CME) took a worst hit with a drop of 11.5% YoY and 4.9% QoQ. The majority of IT companies are struggling for note-worthy growth in the CMT segment, and there is no relief expected in the near term in this regard.

Motilal's note added, "Near-term growth remains weak and we await greater comfort on margins. We value the stock at 19x FY25E EPS. We maintain our Neutral rating on the stock." The brokerage has given a target price of Rs 1,040 apiece on Tech Mahindra.

On the other hand, Kotak Institutional Equities trimmed its target price.

Kotak's note said, "TechM is rationalizing business and internal operations visible through recent measures. These are necessary and beneficial in the long term but extract a toll on near-term financials due to the upfront costs involved. Sharp revenue and margin miss are driven by one-offs from the termination of non-core business, made worse due to client-specific issues in the telecom vertical and weak discretionary spending. The pain will continue in the December quarter as well. We cut FY2025-26 revenue estimates by 5-6% and EBIT margin by 0-60 bps, leading to EPS cuts of 5-11%. We value the stock at an unchanged 17X multiple, leading to an FV of Rs1,150 (Rs1,210 earlier). Maintain REDUCE."

Tech Mahindra has declared an interim dividend of Rs 12/- per equity share of Rs 5/- each i.e. 240% of the face value. It said, fixed Thursday, November 2, 2023, as the record date for determining the members entitled to receive the Interim dividend.

Tech Mahindra plans to pay the dividend by November 21.

Disclaimer:

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