Tech Mahindra's road to recovery could be long and weary

livemint.com:

Tech Mahindra Ltd. fell short of the mark in its June quarter (Q1FY24) earnings, disappointing its investors and sending shares down almost 3% in the National Stock Exchange's early trading on Thursday. The company reported a disheartening 4.2% sequential drop in constant currency revenue, failing to meet analyst expectations.

The communications vertical, notably underperforming, played a significant role in the revenue slump. Ebit (earnings before interest and tax) margin also plummeted to a multi-quarter low of 6.8%, a result of bad debt provisions and a sudden fall in network services revenue. Unlike its peers, Tech Mahindra experienced a lag in deal victories.

The firm saw its net new large deal wins, valued at $359 million, decline both quarter-on-quarter and yearly, despite a robust pipeline, due to delayed closures. Unfortunately, the road to recovery is not an easy one and could take time. "While we remain optimistic about the new CEO, Mohit Joshi – we believe he has a tall ask ahead of him, to resurrect performance in growth/margins," said Nuvama Research.

"Any strategy that he might devise and implement, will take time to reflect in earnings – during which period, the stock is likely to underperform peers," added the report. In their earnings call, Tech Mahindra's management attributed the sharp downturn in the telecom sector to clients' reduced discretionary spending and some project terminations. Although most obstacles have been overcome, the company is dealing with continued budget constraints in the telecom division, implying a gradual recovery.

But for now, there have been sharp earnings cut by some brokerages. "We cut FY2024-26 EPS estimates by 6-18% with the maximum reserved for FY2024. We forecast