Tech Mahindra Q1 Results Review - Telecom, BFSI Verticals Remain Weak: Systematix

NDTV Profit’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies. These reports offer NDTV Profit’s subscribers an opportunity to expand their understanding of companies, sectors and the economy..Systematix Research Report.Tech Mahindra Ltd.'s Q1 FY25 revenue and margin slightly surpassed our expectations, with revenue rising 0.7% QoQ in constant currency and USD terms. All verticals except communication (33.1% of revenue mix as on Q1 FY25) grew QoQ. U.S. market drove growth while Europe and Rest of World markets reported a decline. Cost optimization initiatives and lower sub con costs aided margins in Q1, mitigating the Comviva seasonality related margin drag and annual visa costs. The company said there was no material change in the Q1 demand environment versus Q4. The 9.9% YoY decline in communications during Q1 FY25 could be viewed as some improvement over the 12.4% decline witnessed in FY24. Management believes although the sector may continue to see near term stress, vendor consolidation and revenue revival on the B2B and B2C sides for telcos could restore spending in the vertical over the long term. The company is already seeing some revival within the card payment infrastructure, risk and compliance and insurance subsegments of the BFSI space. However, challenges in wealth management persist, although management does not expect any immediate recovery in the BFSI space in the near term. It stated that the recent Crowdstrike issue has had no bearing on the company’s operations. As per the company’s assessment, lack of robust validation and assurance processes caused this issue, which currently has been hindering widespread AI adoption. Normalizing subcontractor (subcon) costs (after a spike in Q4) aided margins, which we believe will continue to descend gradually in the near term but pick up once demand revives. While employee costs too would continue to benefit from the moderating attrition, other expenses may stay elevated and likely restrict any material margin expansion, in our view. We estimate a 4% CAGR in USD revenue over FY24-26E (versus 6.4% earlier). Although we expect margins to improve slightly in FY25 on benign employee costs and moderating subcon expenses, some of the other costs such as selling, general and administrative costs could gradually rise once demand returns. Tech Mahindra has been trading at high teen valuations in the last 10 years on average. Given the sharp run up in the stock price (>30% since the low of June 04, 2024), Tech Mahindra now trades at an unreasonable valuation of 35x+ one year forward, in our view, despite weak outlook in two of its key verticals and total contract value hovering at around $500 million. We maintain a Sell rating on Tech Mahindra, with a target price of Rs 1,010 (Rs 1,005 earlier), valuing the company at 16 times FY26E earnings per share. Material improvement in the communications and BFSI sectors, improvement in TCV, better-than-expected margins are key upside risks. .Click on the attachment to read the full report:.Tech Mahindra Q1 Results: Profit Rises 30%, Meets Estimates.DISCLAIMERThis report is authored by an external party. NDTV Profit does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of NDTV Profit..Users have no license to copy, modify, or distribute the content without permission of the Original Owner.

Tech Mahindra Q1 Results Review - Telecom, BFSI Verticals Remain Weak: Systematix

While employee costs too would continue to benefit from the moderating attrition, other expenses may stay elevated and likely restrict any material margin expansion, in brokerage's view.

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