Tech Mahindra’s strategy gives hope, but watch out for risks along the way

livemint.com:

Tech Mahindra will take several steps, including scaling up capabilities in key markets and service lines, focusing on top accounts, and implementing a cost-optimization programme named Project Fortius, which is expected to yield an average benefit of $250 million annually over FY25-FY27, according to management. Additionally, the company plans to consistently hire freshers to improve its workforce structure over the medium term. The management also aims to increase its return on capital employed (RoCE) to over 30% and return at least 85% of the free cash flow to investors by FY27.

So far, so good. Investors are excited, taking Tech Mahindra’s shares up more than 10% in early trade on Friday. Broadly, while analysts are upbeat about the strategy, they are also cognizant of the hurdles along the way in achieving success.

“While management's plan is comprehensive, its execution amidst a weak demand environment carries risk," said analysts from Jefferies India in a report on 26 April. Prabhudas Lilladher analyst wrote in a report, “Given the demand within communications (about 36% of revenue) remained weak and unstable, we believe the company’s laid out strategy to drive balanced portfolio mix with reduced dependency on communications is positive." The brokerage, which has a ‘hold’ rating on the stock, added: “However, the cyclicality of its portfolio business and weakness across its business units seem to be challenging, hence we would wait for early sign of recovery before we turn positive on the name." To be sure, many analysts are cautious on the stock. Tech Mahindra’s March quarter (Q4FY24) results were nothing to write home about.