Pune-based IT major Tech Mahindra is expected to report subdued numbers in the second quarter of FY24 due to the lacklustre demand environment, weak performance across communications and enterprise segment, delayed telecom revenue and weak discretionary spends. Tech Mahindra will post its Q2 earnings on October 25, 2023. Analysts from brokerage firms said that Tech Mahindra is expected to post revenue at around Rs 13,000 crore during the quarter in review. The company’s net profit may decline by around 37 per cent on-year and the quarter is expected to witness certain one-time costs, said analysts.
“We expect revenues to remain flat QoQ in c/c terms, with weak performance across the communications and enterprise segments. The Q1FY24 EBIT margin was impacted by 200 bps due to the unanticipated bankruptcy of a client. We forecast a stable adjusted EBIT margin at 8.8 per cent. The company may have one-time costs in the quarter, which are difficult to quantify. Hence, we do not bake the same in our estimates,” said Kawaljeet Saluja – Head of Research – Kotak Institutional Equities. The IT company’s deal wins are expected to remain muted due to weak macro and slow decision making. Kotak Institutional Equities forecast net new TCV of $400-500 million. “We expect quarterly financials to have limited sway in the near-term with focus on turnaround under Mohit Joshi. The recently announced organization structure can lead to a few exits at the leadership levels,” Kawaljeet Saluja added.
Meanwhile, Dhruv Mudaraddi, Research Analyst, StoxBox, added, “We anticipate Tech Mahindra to report a marginal decline in its Q2FY24 revenue sequentially, attributed to a prolonged slowdown in demand across the communication and enterprise sectors and project ramp-downs at the start of the quarter. Along with the weak topline, a contraction in margins is also foreseen due to the organization’s restructuring exercise undertaken during the quarter. The deal wins have also been weaker during the quarter which might adversely impact short-term growth.”
IT sector Q2 performance
Among IT companies in India, TCS, Infosys, HCL Technologies and Wipro, among others, have so far announced a muted Q2 earnings on the backdrop of ongoing macroeconomic worries. HDFC Securities’ Apurva Prasad said, “The IT sector’s recent outperformance has been driven by valuation multiples rising by 10 per cent in the last three months and the valuation gap to Accenture narrowing (highly correlated), despite earnings estimates being cut by ~5 per cent. We expect the sector’s revenue growth to recover to ~9 per cent in FY25E, following ~4 per cent in FY24E; the margin is expected to improve in FY25E, following a flat trajectory in FY24E.”
What to look out for?
Investors will look out for announcements on deal TCVs and pipeline within the communication vertical, pricing dynamics, attrition rates, and the outlook on growth, margins, and DSO days will be crucial, along with any commentary provided on the anticipated impact of the ongoing 5G rollout.
“We expect investor focus on: (1) turnaround strategy and implications of recently announced organization structure that will be effective January 2024, (2) timing of divestments of low margin business that will aid margins but adversely impact revenue growth, (3) outlook for margins in FY2024 noting current level of margins are materially lower than normalized levels and levers that can be flexed to improve margins, (4) margin normalization timelines and aspirational growth and margin levels, (5) outlook for vulnerable segments such as XDS, ERD and network services which have higher exposure to discretionary spending, (6) health of deal pipeline and positioning in cost take-out deals, (7) any revenue leakage in existing accounts and positioning in vendor consolidation events, (8) outlook for revenue growth in top telecom clients and (9) requests for furloughs in retail vertical and BPO services,” said Kawaljeet Saluja.
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