New CEO’s initiatives-A strong premise for stock to re-rate structurally

We believe, Ebit margin improvement is a low hanging fruit for Tech Mahindra Ltd.’s new Chief Executive Officer Mr. Mohit Joshi; however, top line revival may take some time. That said, Mr Joshi’s opening gambit (appointment of COO Mr. Atul Soneja and an internal reshuffle) bolsters our conviction for a successful turnaround.

On balance, we also take cognizance that this is contingent on improving capabilities and filling white spaces in non-communication verticals, which should start reflecting in deal wins and market share gains.

Tech Mahindra’s valuation looks stretched on consensus’ estimates. But, Mr. Joshi’s initiatives playing out could form a strong premise for the stock to re-rate structurally.

Given the backdrop, we increase our target multiple to 20 times (earlier: 14 times) and upgrade Tech Mahindra to ‘Buy’.

Tech Mahindra (28%) has outperformed Nifty IT (17%) on a year-to-date basis despite showing weak results over the past three quarters. From our recent discussion with Tech Mahindra management, we believe that Ebit margin can improve to ~15– 16%, i.e. by ~500–600 bps over FY24-26 versus street’s estimate of 13.2% in FY26.

However, mired by soft demand in the telecom vertical and weaker capabilities in other verticals, top line revival will take some time.

We assume 10%/13.3% YoY constant currency revenue growth for FY25E/26E.

Our earnings per share estimate increase of 10%/24% rides largely on the back of stronger ~200/300 bps FY25/26 Ebit margin boost.

For report, https://www.bqprime.com/research-reports/tech-mahindra-turnaround-around-the-corner-upgrade-to-buy-icici-securities

Bloomberg