Earnings Outlook
Manufacturing, hi-tech operations to drive Tech Mahindra growth QoQ
This story was originally published at 15:19 IST on 18 July 2024
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By Anjana Therese Antony
MUMBAI – Growth in manufacturing and hi-tech verticals of Tech Mahindra Ltd is expected to drive sequential earnings growth for the June quarter, according to broking firms. Also, the cost efficiency measures the company had announced in the previous quarter's earnings are likely to give some positive results this time, leading to a sequential expansion in operating margin, brokerages said.
However, continued weakness in its core communications, media, and entertainment vertical is likely to limit the growth. Analysts said though the worst is behind for this division, the recovery may take a longer time. This segment, which constitutes about 37% of sales, has taken a hit in the previous few quarters due to major cuts in discretionary spending by telecom companies and global macroeconomic challenges.
For Apr-Jun, the Pune-based company's consolidated net profit is likely to have grown nearly over 37% sequentially to 9.09 bln rupees, according to the average of estimates by 12 broking firms. IDBI Capital Market Services has the highest bottomline estimate of 11.95 bln rupees, while Motilal Oswal Financial Services has the lowest of 8 bln rupees.
Consolidated revenue for the quarter is seen up 0.7% sequentially to 129.63 bln rupees, according to estimates. KR Choksey Research has the maximum topline estimate of 131.59 bln rupees and IDBI Capital has the lowest of 128.41 bln rupees.
From a year ago, the bottomline is likely to have risen more than 31%, while the topline could have fallen 1.5%.
The company is scheduled to release its earnings on Jul 25. Investors will closely watch for the management's comments on demand recovery in the core vertical, business outlook, trends in discretionary spending, deal wins in various segments, and updates about the new three-year margin growth plan.
MARGIN, GROWTH PROGRAMME
The Pune-based company's earnings before interest and tax margin are seen in the range of 7.70-10.21%, as per eight estimates, higher than the 7.4% in the previous quarter. This would also be an expansion from 5.4% in Oct-Dec and from the historic low of 4.7% in Jul-Sep last year.
This margin expansion will be backed by cost-control efforts the company announced during the March quarter earnings call, during which a three-year plan was briefed that could help attain a 15?IT margin by 2026-27 (Apr-Mar). While investors then cheered the new plan, which pushed the stock price over 13% to a near-three-month high, analysts had said they would wait for the impact of the plan before looking for re-ratings or revising their outlook.
DEALS
Broking firms have divided views on Tech Mahindra's deal wins, with some expecting the total contract value to be higher than the $500 mln it reported for the March quarter, while others see the figure to be steady. The metric was below the $700 mln-$1,000 mln target for the fifth consecutive quarter in Jan-Mar, Nirmal Bang Institutional Equities said in its earnings preview report.
"We think the new organisational set up is just falling in place and we think under Mohit Joshi, TML (Tech Mahindra) will be much more selective in bidding for large deals," Nirmal Bang said. "This makes us believe that it will only slowly move towards the guidance range," it added.
At 1415 IST, shares of Tech Mahindra traded 1.7% higher at 1,543.55 rupees on the National Stock Exchange. "We expect quarterly financials to have limited sway on stock performance in the near-term with focus entirely on medium targets laid by the CEO (Mohit Joshi)," Kotak Institutional Equities said in its earnings preview report. Joshi took over as the company's managing director and chief executive officer in December for five years.
Following are the Apr-Jun earnings estimates for Tech Mahindra based on reports compiled by Informist from 12 brokerage houses:
| Broking firm | Net Sales | Net Profit | EBITDA |
| ----(in mln rupees)---- | |||
| Anand Rathi Share and Stock Brokers Ltd | 129,885 | 8,841 | 15,620 |
| IDBI Capital Market Services Ltd | 128,413 | 11,953 | -- |
| Incred Research Services Pvt Ltd | 129,252 | 9,165 | -- |
| Indsec Securities and Finance Ltd | 129,700 | 8,700 | -- |
| Kotak Institutional Equities | 129,485 | 8,967 | 15,595 |
| KR Choksey Research | 131,586 | 8,815 | -- |
| Motilal Oswal Financial Services Ltd | 130,000 | 8,000 | 14,000 |
| Nirmal Bang Equities Pvt Ltd | 129,306 | 9,068 | -- |
| Nuvama Wealth Management Ltd | 129,360 | 9,214 | 14,913 |
| PhillipCapital (India) Pvt Ltd | 129,626 | 8,586 | -- |
| Prabhudas Lilladher Pvt Ltd | 129,400 | 8,800 | -- |
| Sharekhan Ltd | 129,590 | 8,940 | -- |
| Average | 129,633.58 | 9,087 | 15,032 |
End
US$1 = 83.64 rupees
Edited by Akul Nishant Akhoury
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