As Tech Mahindra bets big on Products & Platforms business, here’s what brokerages say

Though the stock has gained over 7 percent in 2023 so far, the outlook on IT services companies remains bearish due to recession fears in the US and Europe

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Tech Mahindra’s new announcements for its products and platforms business has not impressed analysts. Most of the foreign brokerages have not upgraded their rating or target price on the stock. Neither have they cut target prices.

With a commitment of investing Rs 700 crore in the products and platforms business, the management of Tech Mahindra expects the segment to grow to about $1 billion in less than three years.

“We are creating two new streams of business: products and platforms (P&P) and co-creation with customers. These will be a big growth opportunity for us,” MD & CEO CP Gurnani said on March 5 at the company’s investor day.

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Nomura has maintained its Buy rating with a target of Rs 1,260 per share. “The management aims to create value through mergers and acquisitions, synergies from portfolio companies, and joint ventures,” Nomura said in its report.

Morgan Stanley has maintained its Overweight rating with a target of Rs 1,120 per share. The management has a constructive medium-term outlook on demand, barring near-term uncertainty, the foreign brokerage noted.

“They are building capabilities around P&P and expect margin recovery to take 2-3 years,” it added.

Also Read: Decisions delayed but clients not asking for price cuts: Tech Mahindra CEO CP Gurnani

CLSA has given Tech Mahindra an Underperform rating with a target of Rs 1,100 per share. While the focus on P&P business is in line with margin management, Tech Mahindra expects weaker Q4FY23 compared to peers. This is what is keeping CLSA analysts at bay.

“However, the company highlighted a 4 percent dividend yield and an inexpensive valuation of 16x for FY24 limits the downside in the stock,” it noted.

JPMorgan has a Neutral rating on the stock with a target of Rs 1,100 per share. According to JPMorgan analysts, the wait for a new CEO and peak utilization level are some key risks.

Meanwhile, domestic brokerage firm ICICI Securities has downgraded the stock from Hold to Reduce, with target price of Rs 1086 apiece. It does not expect earnings fundamentals to materially change for the company over next three years, despite potential leadership change. Current CEO CP Gurnani’s tenure ends in December 2023.

In Q3 FY23, Tech Mahindra reported a consolidated net profit of Rs 1,297 crore, down 5.3 percent year-on-year. Revenue from operations came in at Rs 13,735 crore, rising 19.9 percent from Rs 11,450 crore in the corresponding quarter of the previous year.

Operating margins stood at 16 percent, compared to 18 percent in the year-ago period and 20 percent in pre-COVID era.

Though the stock has gained over 7 percent in 2023 so far, the outlook on IT services companies remains bearish due to recession fears in the US and Europe. In Moneycontrol’s Analyst Tracker, Tech Mahindra is in the ‘Maximum Pessimism’ list with 21 Buy calls, 15 Hold and 8 Sell calls.

At 10 am, the stock was quoting at Rs 1,090.50, trading near the flatline.