Tech Mahindra's target of achieving a 15% EBIT margin by financial year 2027 appears to be a 'tough ask', and the information technology company can realistically achieve only 12.5% to 13.5%, research firm Macquarie said, while maintaining its 'underperform' rating on the stock and revising its target price marginally upwards to Rs 1,090 from Rs 1,050.
This outlook is also based on the company's heavy exposure to the struggling telecom vertical, which is a major drag on profitability.
Lagging Telecom Vertical
A central concern highlighted by Macquarie is Tech Mahindra's over 30% revenue reliance on the telecom vertical. This sector has seen years of underinvestment, creating a tough environment for growth. Adding to this, Tech Mahindra's status as an 'incumbent' in the telecom space leads to an anticipated revenue decline in this segment.
Beyond telecom, the analyst indicates that Tech Mahindra's performance in other verticals has also lagged behind its peers, bringing broader challenges in growth across its service offerings.
The Tough Ask
The brokerage dissects the feasibility of the 15% EBIT margin target, noting that though the management has stated this goal, historical performance suggests a difficult path. In the past, layoffs and a reduction in software professionals have not yielded much margin improvement.
A significant factor contributing to this difficulty is the rise in employee costs, which Macquarie identifies as the primary drag on profitability.
"We think the IT Services EBITA margin improvement in FY25 is largely optical due to a new carve-out of corporate expenses as unallocable," according to the brokerage.
Macquarie's Pick And Outlook
The analysts cite limited catalysts for a significant turnaround, primarily expecting any EBIT margin improvement to be pulled back by a lack of provision reversals and a continued growth gap.
Macquarie concludes that expecting a rapid turnaround for a large firm with such a high concentration in the telecom sector is unrealistic.
LTIMindtree, with an 'outperform' with the target price of Rs 6,200, is preferred over Tech Mahindra. It is more attractively positioned due to a superior vertical mix and the potential for significantly faster growth.
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