Tech Mahindra Q3 Results Review - Tepid; Margin Pickup Remains Key For A Rerating: Motilal Oswal

Motilal Oswal Report

Tech Mahindra Ltd. reported Q3 FY24 revenue of $1.57 billion, up 1.1% QoQ in constant currency terms. Adjusting for a one-time product-related revenue gain of 140 bp, Q3 growth came 80 basis points ahead of our expectation. Communication, media and entertainment remains a weak area, declining marginally despite a low base. Enterprise growth was mixed, with manufacturing and retail doing well, while banking, financial services and insurance and technology declined.

Tech Mahindra had another quarter of low profitability, with 7.0% adjusted Ebit margin (excluding restructuring and other one-time costs), down 30 bp QoQ/500 bp YoY and slightly below our estimates. Reported Ebit margin stood at 5.4%, up 70bp QoQ.

Q3 total contract value came in at $381 million (-40% QoQ/-52% YoY), pulling down its trailing 12 months total contract value/book to bill to its lowest in the last three/five years.

We remain positive about the restructuring initiatives at Tech Mahindra under the new leadership. The recent steps, including right-sizing strategic business units, investing in key accounts, establishing vertical delivery teams, and prioritising employee investments, as moves in the right direction.

However, we expect to see the positive impact of these actions only gradually, which can result in near-term misalignment with investor expectations, particularly in terms of profitability. With the management committing to incremental clarity post Q4 earnings, April remains the key to any view change.

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