“Tech Mahindra 3Q results were in line, with growth driven by communications and BPO. Company outlook matches with our sector stance of macro impact on demand, pullback in smaller deal flow, top clientele moderation and softness in BFSI/Hitech. We see possibility of similar cost aggression as seen in past instances of margin fall-off in FY17/FY20, where margins recovered through employee cuts/low or no wage hikes,” said Ambit Capital.

For now, Tech Mahindra stays a tactical play on margin recovery, available at reasonable valuations with implied USD revenue CAGR of 5.1% over FY22-32E. Clarity on management change and more disciplined execution required for structurally positive stance, the brokerage added which has maintained its Buy rating on Tech Mahindra shares with a target price of ₹1,190 apiece.

“TechM’s 3QFY23 revenue growth was in line; however, 60bps QoQ margin expansion and ₹1.3bn fx gains drove the profit beat. While deal TCV of US $795m was healthy, sharp decline in headcount does not bode well for its growth outlook. We raise our estimates by 1-5% to factor higher margins but maintain Hold with revised PT of ₹1,030 based 14x PE given uncertain growth outlook,” said global brokerage Jefferies.

The IT company‘s Chief Financial Officer (CFO) Rohit Anand attributed the margin impact to pressures on the supply side, wherein higher wages impacted profitability.

“The management highlighted that while order bookings are healthy, revenue growth may get impacted due to lower number of smaller engagements. Tech Mahindra is also witnessing pressures in its core markets and has called a marked slowdown in Hi-Tech. Amidst an uncertain outlook. TechM’s employee base decline of 6.8K – its largest decline in over a decade – does not bode well for its growth outlook,” Jefferies added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.