Tech Mahindra, one of the big five domestic tech companies, came under sharp selling pressure on Tuesday, following the announcement of its December quarter earnings. At its day low, Tech Mahindra shares were down over 5 per cent and the stock was among the top Nifty losers.
Here’s why Tech Mahindra shares slumped today:
1) Tech Mahindra’s revenue grew by just 0.4 per cent sequentially to $1,015 million, missing expectations by a wide margin. Tech Mahindra’s revenue growth was marginally better than Wipro, which posted 0.3 per cent sequential rise in US dollar revenue, but the company underperformed both HCL Tech (1.4 per cent sequential growth) and Infosys (0.6 per cent sequential growth) in revenue growth.
2) The underperformance in Tech Mahindra’s communications vertical, which accounts for nearly 50 per cent of the company’s revenue, is worrying investors. The management expects the growth in communications vertical to remain subdued for the next two quarters as well.
3) Tech Mahindra’s EBIT or operating margin rose by 66 basis points sequentially to 14.36 per cent, but margins are down by nearly 330 basis points year-on-year. Tech Mahindra’s missed margin expectations despite a fall in operating (SG&A) expenses and rupee depreciation. Girish Pai of Nirmal Bang Securities expects Tech Mahindra’s margins to remain under pressure because wage hikes will kick in effective January 1, 2016.
Other key negatives include a dip in large deal total contract value, from $300 million in the September quarter to $275 million in the December quarter and falling market share in key geographies of Europe and North America.
Nirmal Bang has a “sell” rating on Tech Mahindra (target Rs 497), but Religare retained its “buy” (target Rs 610) call on the stock, citing attractive valuations. Tech Mahindra shares closed 4.65 per cent lower at Rs 474.45, underperforming the broader Nifty, which ended 1.33 per cent lower 7,455.55.