Tech Mahindra Q4 Results Review - Expect FY24 Growth To Remain Muted: Motilal Oswal

Motilal Oswal Report

Tech Mahindra Ltd.’s Q4 FY23 revenue of $1.67 billion rose 0.3% QoQ in constant currency, a tad ahead of our estimates of 0.7% decline. Retail (-10% QoQ) dragged Q4 FY23 growth. Ebit margin was down 80 basis points QoQ to 11.2% (versus estimate of 11.9%). The company delivered weak total contract value of $593 million, down 25% QoQ.

Weak macro environment, delayed decision making and cuts in discretionary spends hit Q4 FY23 growth. Management indicated that the situation is likely to remain so in H1 FY24 before picking up in H2 FY24E.

We see muted growth (4.7% CC) for FY24E given the low deal wins, poor exit to FY23 and likely weakness in H1 FY24. With macro stabilising over H2 FY24E and pick up in 5G spends, we are factoring in FY25E U.S. dollar CC growth of 10.1%.

Overall, we expect Tech Mahindra to deliver 7.8% U.S. dollar compound annual growth rate over FY23-25.

On margins front, poor Q4 exit and slow growth to limit margin pick up in FY24E despite continued efforts from the company to revert closer to 14%.

We see FY24E/FY25E margins at 11.7%/12.9% led by Q4 FY23 miss and continued macro pressure. This should result in FY23-25E profit after tax CAGR of 12% despite the low FY23 base (PAT decline of 8.9%).

While we expect a potential for performance improvement post the leadership refresh of Tech Mahindra in June 2023, we believe this will take time given the macro headwinds and limited flexibility to invest in growth because of weak current profitability.

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