Tech Mahindra investors concerned as they wait for a turnaround

Tech Mahindra Ltd is facing both internal and external challenges, leaving investors nervous. While the company saw a 1.1% constant currency revenue growth in the December quarter, it was largely due to seasonal strength in Comviva and certain one-time revenue. The company’s revenue beat was also dampened by a bleak outlook and delayed turnaround, causing a drop in company shares.

The overall demand environment has shown slight improvement, but the management remains cautious about it being too early to call them “green shoots”. The weakness in the company’s key telecom vertical has not yet bottomed out, and deal wins have been disappointing. Tech Mahindra’s heavy reliance on the telecom sector, which has witnessed client caution, has also hindered deal momentum.

Accounting for exceptional reorganization efforts, Tech Mahindra’s normalized Ebit margin stood at 7% in Q3. The company plans to prioritize margins over revenue in the short to medium term, avoiding sub-optimal deals.

Investors are waiting for the new chief executive Mohit Joshi’s detailed growth strategy, which is expected to be unveiled in April. The company plans to focus on enhancing operational value through a three-pronged strategy: improving sales efficiency, enhancing margins, and increasing agility.

However, these initiatives have failed to prevent an earnings estimates cut, with Kotak Institutional Equities cutting its FY24 and FY26 earnings per share estimates. As a result, Tech Mahindra’s valuation gap with larger peers like Tata Consultancy Services and Infosys is expected to continue until clear signs of sustainable earnings recovery appear. Tech Mahindra trades at a FY25 price-to-earnings multiple of 23 times, compared to nearly 27 and 25 times for Tata Consultancy Services and Infosys, respectively.