Tech Mahindra is balancing growth at the cost of margins, says Motilal Oswal

Tech Mahindra’s operating margin in FY23 came in at 11.3 percent, down 320 basis points year-on-year

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Tech Mahindra’s FY23 growth was affected by softness in discretionary spending and structural weakness in the CME (communications, media & entertainment) vertical. Going ahead, analysts at Motilal Oswal Financial Services await greater comfort on sustainable and profitable growth.

Analysing the IT services company’s FY23 annual report, the domestic broking firm said on July 10 Tech Mahindra has high exposure to the CME vertical, around 40 percent of the revenue, which offers a significant opportunity for a broader 5G rollout and a new spending cycle in the space.

The broker has a “neutral” rating on the stock with a target price of Rs 1,110, about 5 percent below the current market price.

At 11.30 am, Tech Mahindra was quoting at Rs 1,137.80 on the NSE, down 1.4 percent from the previous close.

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Tech Mahindra’s annual report points out that the inflationary environment has led to a massive transformation in tech spending strategies employed by enterprises.

In response to rising costs, businesses are now focusing on conserving resources and optimising expenditures. This shift reflects a strategic approach to adapt to the challenging economic landscape.

Tech Mahindra’s adjusted operating margin in FY23 came in at 11.3 percent, down 320 basis points year-on-year. The margin contraction was mainly due to robust hiring, intense compensation revision and elevated subcontracting as percentage of topline at 15 percent.

One basis point is one-hundredth of a percentage point.

“Subcontract expenses are expected to moderate gradually as more employees become part of the billing cycle,” Motilal Oswal said.

The company generated ROE/ROCE of 18.5/18.6 percent in FY23 against 21.5/21 percent in FY22. ROE stands for return on equity and ROCE for return on capital employed.

“Considering the near-term weakness, we await greater comfort on sustainable and profitable growth. We value the stock at 16x FY25 earnings per share estimate,” the broking firm said.

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