Why Tech Mahindra Shares Plunged 15% Today

Tech Mahindra shares fell as much as 15 per cent on Wednesday as the outsourcer missed profit estimates in the March quarter. Most frontline IT stocks fell tracking Tech Mahindra's weak earnings. The stock was the top loser in the 50-share Nifty index.
Here's why Tech Mahindra shares plunged today:
1) Tech Mahindra, India's fifth largest IT services company, on Tuesday reported a 39 per cent sequential drop in net profit for the January to March period. Tech Mahindra's Q4 net profit of Rs 472 crore was sharply lower than the Rs 724 crore number estimated by analysts polled by NDTV.
2) Tech Mahindra's Q4 operating or EBIT margin dropped 530 basis points sequentially to 12.4 per cent. Vineet Nayyar, executive vice chairman of Tech Mahindra said there were reasons for the sharp drop in margins - i) Wage hike: Tech Mahindra gives salary hikes to employees on January 1. Salary hikes impacted margins by 200 basis points in the March quarter, he added. ii) Currency hit: According to Mr Nayyar, the appreciation in US dollar hit Tech Mahindra's earnings in other currencies such as euro, Australian dollar, Canadian dollar, etc., which impacted margins by another 200 basis points. iii) Tech Mahindra's acquisition of Lightbridge Communications Corporation (LCC), the US-based global network services provider the company acquired for $240 million in November 2014 also hit margins. Mr Nayyar said Tech Mahindra's strategy is to acquire low EBITDA companies such as LCC and bring them up to health.
3) Bhavin Shah, CEO of Equirus Securities told NDTV that Tech Mahindra has disappointed both on revenue and margin front. Tech Mahindra's constant currency dollar revenue growth also disappointed the Street. The company's dollar revenue declined by 1.2 per cent sequentially, lagging its peers by a wide margin. In the March quarter, TCS had reported a 1.6 per cent sequential growth in dollar revenues, HCL Tech grew at 2.7 per cent and Wipro posted a 1.2 per cent growth. Only Infosys posted weaker number, with its dollar revenue (cc) falling 0.4 per cent in the March quarter.
4) Revenues were hit because of weakness in telecom and manufacturing verticals, analysts said. The Telecom vertical accounts for 55 per cent of Tech Mahindra's revenues.
Brokerages on Tech Mahindra:
CLSA maintained its "sell" call on Tech Mahindra (target Rs 550) citing weak Q4 numbers. Macquarie retained its "neutral" call (target Rs 625).
Credit Suisse retained its "outperform" call though it cut its target on Tech Mahindra to Rs 775 from Rs 825. Tech Mahindra is poised for decent revenue growth in future, the brokerage said.
Tech Mahindra shares ended 14.12 per cent lower at Rs 549.10, underperforming the broader Nifty, which closed flat.

Tech Mahindra shares fell as much as 15 per cent on Wednesday as the outsourcer missed profit estimates in the March quarter. Most frontline IT stocks fell tracking Tech Mahindra's weak earnings. The stock was the top loser in the 50-share Nifty index.
Here's why Tech Mahindra shares plunged today:
1) Tech Mahindra, India's fifth largest IT services company, on Tuesday reported a 39 per cent sequential drop in net profit for the January to March period. Tech Mahindra's Q4 net profit of Rs 472 crore was sharply lower than the Rs 724 crore number estimated by analysts polled by NDTV.
2) Tech Mahindra's Q4 operating or EBIT margin dropped 530 basis points sequentially to 12.4 per cent. Vineet Nayyar, executive vice chairman of Tech Mahindra said there were reasons for the sharp drop in margins - i) Wage hike: Tech Mahindra gives salary hikes to employees on January 1. Salary hikes impacted margins by 200 basis points in the March quarter, he added. ii) Currency hit: According to Mr Nayyar, the appreciation in US dollar hit Tech Mahindra's earnings in other currencies such as euro, Australian dollar, Canadian dollar, etc., which impacted margins by another 200 basis points. iii) Tech Mahindra's acquisition of Lightbridge Communications Corporation (LCC), the US-based global network services provider the company acquired for $240 million in November 2014 also hit margins. Mr Nayyar said Tech Mahindra's strategy is to acquire low EBITDA companies such as LCC and bring them up to health.
3) Bhavin Shah, CEO of Equirus Securities told NDTV that Tech Mahindra has disappointed both on revenue and margin front. Tech Mahindra's constant currency dollar revenue growth also disappointed the Street. The company's dollar revenue declined by 1.2 per cent sequentially, lagging its peers by a wide margin. In the March quarter, TCS had reported a 1.6 per cent sequential growth in dollar revenues, HCL Tech grew at 2.7 per cent and Wipro posted a 1.2 per cent growth. Only Infosys posted weaker number, with its dollar revenue (cc) falling 0.4 per cent in the March quarter.
4) Revenues were hit because of weakness in telecom and manufacturing verticals, analysts said. The Telecom vertical accounts for 55 per cent of Tech Mahindra's revenues.
Brokerages on Tech Mahindra:
CLSA maintained its "sell" call on Tech Mahindra (target Rs 550) citing weak Q4 numbers. Macquarie retained its "neutral" call (target Rs 625).
Credit Suisse retained its "outperform" call though it cut its target on Tech Mahindra to Rs 775 from Rs 825. Tech Mahindra is poised for decent revenue growth in future, the brokerage said.
Tech Mahindra shares ended 14.12 per cent lower at Rs 549.10, underperforming the broader Nifty, which closed flat.