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Tech Mahindra shares fall 5% on weak Q1 numbers; brokerages cut target price

Tech Mahindra shares fall 5% on weak Q1 numbers; brokerages cut target price

Tech Mahindra shares fall 5% on weak Q1 numbers; brokerages cut target price
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By Pranati Deva  Jul 31, 2019 10:22:56 AM IST (Published)

Shares of Tech Mahindra fell nearly 5 percent after it reported a 15.3 percent fall in its June quarter net profit at Rs 959 crore against Rs 1,132.5 crore in the quarter ended March 2019.

Shares of Tech Mahindra fell nearly 5 percent after it reported a 15.3 percent fall in its June quarter net profit at Rs 959 crore against Rs 1,132.5 crore in the quarter ended March 2019.

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The stock fell as much as 4.8 percent to hit its 52-week low of Rs 609.30 per share on the BSE. At 9:55 AM, the stock was trading 3.7 percent lower at 617 as compared to 0.2 percent fall in the BSE Sensex at 37,313.
Revenue fell 2.7 percent at Rs 8,653 crore against Rs 8,892.3 crore in Q4FY19 and dollar revenue slipped 1.6 percent at $1,247.1 million against $1,267.5 million QoQ.
EBIT (earnings before interest and tax) margins also contracted 431 basis points at 11.5 percent QoQ and 1.5 percentage points YoY.
However, digital revenue continues to be positive, up 37.4 percent after the IT company acquired a US-based company for $25 million to enhance its capabilities in digital transformation offerings.
Further, deal wins remain healthy with the company signing contracts worth nearly half a billion dollars as against deal wins worth $408 million in the March quarter.
“We are very encouraged to see TCV deal wins worth close to half a billion dollar across Enterprise and Communications. We remain optimistic about the demand environment, evident from a very strong pipeline and deal conversions. Digital will continue to be a primary growth driver," said CP Gurnani, managing director and chief executive officer, Tech Mahindra.
Brokerages remained bullish on the stock but cut their target price on below-estimate earnings.
Morgan Stanley is 'overweight' on the stock but cut its target to Rs 765 per share from Rs 850 earlier. Q1 revenue is in-line but margin is below estimates, it said, adding that robust deal pipeline gives company confidence for improved growth trajectory.
Morgan Stanley also reduced its EPS estimate by 5 percent for FY20.
CLSA is also bullish on the stock but reduced its target price to Rs 740 per share from Rs 800 earlier. "Tech Mahindra's Q1 revenue declined 1.6 percent while its margin also slipped well below expectations. While these are poor results, the quarter makes the business look worse than it is as deals have piled up and one-off costs have bunched up. Deal wins have remained strong over the past year, which should translate to a growth recovery over Q2-Q4. However, margin resilience is likely to be tested more, as it faces supply challenges, transition costs, and initial digital margin deflation. We cut our revenue estimates by 1-3 percent over FY20-22," it said.
Credit Suisse and BNP Paribas also cut the stock's price target, while maintaining a bullish outlook on the stock.
 
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