Shares of Tech Mahindra hit a one-year low of Rs 1,012.50, down 1 percent on BSE in intraday trade on Thursday. The share price nearly halved from its 52-week high of Rs 1,838 after the company reported weak margins during Q4FY22.
Shares of the information technology (IT) company traded at their lowest level since June 2021. They corrected 45 percent from their 52-week high reached on December 30, 2021.
Brokerage firms have cut both target PE multiples and FY24 earnings estimates for the IT sector on margin concerns.
IT companies saw some revenue decline in the January-March quarter (Q4) in constant currency (CC) after strong growth in Q3. Tier I companies reported an average constant currency growth of 19.9 percent year-on-year. However, global growth is expected to moderate from 6.1 percent in 2021 to 3.6 percent in 2022, driven by a withdrawal of monetary accommodation in major economies, continued supply-side slack and economic damage from the war in Ukraine.
In the fourth quarter, Tech Mahindra’s earnings before interest tax margin (EBITM) declined 160bps QoQ to 13.2 percent due to lower utilization (due to growth hiring and higher fresh intake), supply-side issues (skill-based wage increases and retention costs ), higher D&A costs (additional hardware/software costs and higher depreciation costs on account of acquisitions) and the absence of one-time benefits in last quarter’s SG&A costs.
“Salary increases (to be tranched with a significant tranche in July), visa costs (25-30 basis point impact in Q1FY23) and expected normalization of travel and SG&A expenses are potential headwinds for FY23, for which management expects to be partially offset by operating leverage driven by revenue growth, staff pyramid rationalization, subcontracting costs, optimization, increased utilization (85-88% of target range), higher pricing and an offshore shift,” Emkai Global Financial Services analysts said in a results update.
Tech Mahindra has indicated that it will pause acquisitions in FY23 and focus on integrating the acquired assets. The company stated that depreciation charges will be broadly similar in FY23 and will decrease from FY24 onwards.
“The company also indicated that they do not see any problems as far as the current macroeconomic headwinds are concerned.” Tech Mahindra said this could provide an opportunity for clients to realign their cost structure, but they do not see any knee-jerk reaction in client spending,” an ICICI Securities analyst said in its results update.
Minus target: Rs 928
Tech Mahindra shares appear to be in bearish hands as all technical indicators point to more pain. With today’s low at Rs 1,008, the IT company’s stock breached the lower end of the Bollinger bands on the daily charts, at Rs 1,011. A decisive close below this level may drag the stock towards Rs 928, according to the monthly Fibonacci charts.
(With contributions from Nikita Vashisht)