Tech Mahindra Beats Estimates In Q3. Should You Buy?

Shares of IT outsourcer Tech Mahindra fell as much as 1.34 per cent on Tuesday, despite reporting better-than-estimated earnings for the December quarter. 

Tech Mahindra's revenue grew 5.4 per cent sequentially to Rs 7,558 crore compared to Rs 7,167 crore in the September quarter and its net profit surged 33 per cent sequentially to Rs 856 crore. 

Analysts polled by NDTV Profit had estimated its net profit at Rs 725 crore on revenues of Rs 7,360 crore. 

Its dollar revenue, which is widely tracked by analysts, grew 4.1 per cent sequentially to $1,161 million compared to NDTV Profit's analyst estimate of $1,090 million dollar. 

Tech Mahindra also reported improvement in its profitability. Its EBITDA margin or operating margin improved 80 basis points to 15.7 per cent against estimates of 15.6 per cent by NDTV Profit. 

However, Tech Mahindra's revenue beat was mainly driven by revenues from "Rest of World", whose contribution to its total revenue grew from 21.9 per cent in Q2 to 23.2 per cent. Revenue contribution from US, which is its biggest market and contributes nearly half of its total revenue, declined to 47.8 per cent compared to 48.9 per cent in Q2. 

According to domestic brokerage Nirmal Bang, Tech Mahindra is losing its market shares in communication vertical to its peers, which is a matter of concern. 

"The TTM (trailing twelve months) results of its (Tech Mahindra) large peers have shown relatively strong growth in communications vertical (TCS/Infosys/HCLT growing YoY by 8%/23%/13%, respectively) versus a decline shown by TML, indicating reasonably strong demand conditions and incremental market share shifting away," Nirmal Bang said in a note. 

The brokerage has a "sell" rating on the stock with a target price of Rs 383, indicating a downside potential of 19 per cent from Monday's closing price. 

"Our target P/E multiple (10.1x) is at a 30% discount to the target multiples of TCS/Infosys and reflects TML's structural weaknesses because of its less diversified revenue mix, higher client concentration, lower margins and lower trending RoIC(return on capital employed)," the brokerage said. 

Meanwhile, overall weakness in the IT sector post US President Donald Trump's immigration curbs on seven countries has also hit investor sentiments. The IT sub-index of NSE, Nifty IT was down 1.27 per cent. 

As of 11.37 a.m., Tech Mahindra shares were down 0.51 per cent at Rs 469.20. In comparison, the broader Nifty was 0.68 per cent lower at 8,574.45.