Tech Mahindra down 7%, Citi downgrades stock to ‘sell’ and cuts target price

The global brokerage firm downgraded Tech Mahindra Ltd to ‘sell’ from neutral and reduced the target price of Rs 955 a share from Rs 1,100 earlier

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Tech Mahindra Ltd was more than 7 percent down in the morning trade on April 17 as global brokerage firm Citi downgraded the stock to “sell” from “neutral” and reduced the target price to Rs 955 from Rs 1,100.

The brokerage said Tech Mahindra was downgraded for the following reasons: increased risks to growth in the communications vertical, which accounts for approximately 40 percent of the company’s revenue. Recent data points and commentary have raised concerns, prompting caution from Citi.

There are near-term challenges and a negative catalyst watch is already in place, which may be exacerbated by macroeconomic factors, the brokerage said in its latest report. Operating deleverage may lead to lower margins than what consensus expectations are. Lastly, while there are positives associated with leadership change, they may take some time to materialise.

“In that context, valuations are at 16x 1-yr forward cons EPS – risk-reward looks unfavorable, in our view. We lowered our target multiple to 15x (17x earlier) to factor these risks – new TP of Rs955 (Rs1100 earlier). Our FY24E/FY25E EPS are 7-14 percent below consensus,” Citi said.

It has been a disappointing March quarter for IT firms, so far.

Both Infosys and TCS reported a decline in revenues in the telecom vertical in 4Q, with -8 percent constant currency (CC) quarter on quarter (QoQ) and -2 percent cc QoQ, respectively. Management comments across companies have reflected caution with regard to the telecom sector but the headwinds seem to be stronger than expected.

In its third quarter call, Tech Mahindra had said revenues from top 5 clients had declined due to restructuring in some clients. Though management expected it to stabilise by 4Q, the challenges could persist given macroeconomic uncertainty.

Tech Mahindra is expected to report its March quarter earnings on April 27.

Challenges across multiple verticals such as discretionary cuts and deferrals, vendor consolidation, and pricing pressure could further negatively impact growth, Citi said.

Tech Mahindra has outlined several margin levers, including reducing sub-contracting costs, adjusting the offshoring mix, spinning off or shutting down non-strategic businesses, implementing automation and delivery excellence measures, and leveraging synergies with portfolio companies. The pace of margin improvement in the near term could be slower than expected due to growth challenges and the likelihood of discretionary costs returning, Citi said.

At 9.35 am, the stock was trading 7.3 percent down at Rs 1,007.25 on the National Stock Exchange.