Tech Mahindra Q4 Results Review - Weak Margins Due To Higher Investments: ICICI Securities

ICICI Securities Report

Tech Mahindra Ltd.’s Q4 FY23 revenue grew 0.3% QoQ constant currency, flat QoQ in USD terms, a tad lower than our and consensus estimate (our eatimate: 0.5% QoQ USD, BBG consensus: 0.2% QoQ USD).

Revenue growth was led by communication (0.7% QoQ USD), manufacturing (1.5% QoQ USD) and banking, financial services (0.3% QoQ USD). Tech was flat QoQ and retail declined 10.4% QoQ in USD terms. Top-five client revenue further declined by 5% QoQ and 21% YoY.

Management mentioned this segment has largely bottomed out, but it did not mention the revival journey for top five accounts. Ebit margin came in at 11.2%, down 80 bps QoQ, below our and consensus estimate of 12.1% and 12.3%, respectively. Due to this miss, Ebit was 8% below our estimate.

Tech Mahindra expects to improve margin led by increase in offshoring, pyramid rationalisation, divestment of low profitable business and lower sub-con costs.

Wage hikes are expected to be staggered across the year for FY24, as per the management. Tech Mahindra realised 1% price increase in FY23, but expects limited price rise in FY24 and thus, would rely on last year (FY23) price hikes for reviving margin trajectory.

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