Tech Mahindra hits one year low; stock slips 45% from 52-week high level

Brokerages have slashed both target PE multiples as well as FY24 earnings estimate for the IT sector amid margin concerns

Shares of Tech Mahindra hit a one-year low of Rs 1,012.50, down 1 per cent on the BSE in Thursday’s intra-day trade. The stock price has almost halved from its 52-week high level of Rs 1,838 after the company reported weak margins during Q4FY22.

The stock of the information technology (IT) company traded at its lowest level since June 2021. It has corrected 45 per cent from its 52-week high, touched on December 30, 2021.

Brokerage firms have slashed both target PE multiples as well as FY24 earnings estimate for the IT sector amid margin concerns.

IT companies saw some moderation in revenues in January-March quarter (Q4) in constant currency (CC) terms after witnessing strong growth in Q3. Tier I companies reported average constant currency growth of 19.9 per cent on YoY basis. However, global growth is expected to moderate from 6.1 per cent in 2021 to 3.6 per cent in 2022, driven by withdrawal of monetary accommodation in major economies, continued supply side shortages and economic damage from the war in Ukraine.

In Q4, Tech Mahindra's earnings before interest tax margin (EBITM) declined by 160bps QoQ to 13.2 per cent due to lower utilization (due to recruitment for growth and higher fresher intake), supply-side issues (skill-based salary hikes and retention costs), higher D&A charges (additional hardware/software spends and higher amortization charges on account of acquisitions) and the absence of one-off benefits in SG&A expenses of last quarter.

"Wage hikes (to be done in tranches with a significant tranche in July), visa costs (25-30bps impact in Q1FY23) and expected normalization of travel costs and SG&A expenses are the potential headwinds for FY23, which management expects to be partly offset by revenue growth-led operating leverage, employee pyramid rationalization, subcontracting costs, optimization, increase in utilization (85-88% targeted range), higher pricing, and offshore shift," analysts at Emkay Global Financial Services said in a result update.

Tech Mahindra indicated that they would pause acquisitions in FY23 and focus on integration of assets acquired. The company indicated that amortization costs would largely be similar in FY23 and would taper down from FY24 onwards.

"The company also indicated that they are not seeing any issues as far as current macro headwinds are concerned. Tech Mahindra said it may give an opportunity for the clients to re-align their cost structure but they do not see any knee-jerk reaction in client spending," analyst at ICICI Securities said in their result update.

Tech View

Outlook: Negative

Downside target: Rs 928

Shares of Tech Mahindra seem to be in bears' grip as all technical indicators point towards more pain. With today's low of Rs 1,008, the stock of the IT company has breached the lower end of the Bollinger Bands on the daily charts, placed at Rs 1,011. A decisive close below this level may drag the stock towards Rs 928, as per the monthly Fibonnaci charts. 

All the moving averages have made negative crossovers, while momentum oscillators, too, suggest downward trend in the stock. The stock has an immediate trendline resistance at Rs 1,125, as per the daily chart.

(With inputs from Nikita Vashisht)