By BENGALURU, July 27 (Reuters) – Tech Mahindra (TEML.NS), one of India’s prominent IT services firms, experienced a significant setback in its financial performance, leading to a 5.3% drop in its shares on Thursday, marking its lowest point since June 19. The decline came in the aftermath of the company’s surprising first-quarter results, which revealed a 39% decrease in profit, a significant deviation from analysts’ expectations. The firm recorded a profit of 6.93 billion rupees ($84.5 million) instead of the anticipated 11.32 billion rupees.
The main contributing factor to Tech Mahindra’s underwhelming performance was the prevailing challenging macroeconomic conditions that forced clients to adopt a cautious approach and limit their spending. As a result, the firm’s largest segment, the communications sector, responsible for nearly 40% of its revenue, experienced weakness as telecom clients scaled-down projects to curb costs.
The company faced stiff competition from its rivals, HCL and TCS, as evidenced by the decline in new deal wins during the quarter. The deals secured amounted to $359 million, a significant sequential drop of 39%. Furthermore, the trailing 12-month deal wins plummeted by 25% compared to the previous year, according to an analysis by Morgan Stanley analysts, who expressed concern about the near-term outlook despite hints from the management about revenues bottoming out from top clients.
Tech Mahindra’s financial margins also took a hit during the quarter, with earnings before interest and tax (EBIT) declining to 6.8%, a substantial drop from the 11% reported a year earlier. This decline in margins further underscored the company’s struggle to maintain profitability amid the challenging business environment.
As a response to the disappointing performance, analysts have been cautious in their assessment of Tech Mahindra’s prospects, leading to an average “hold” rating from 38 analysts who closely monitor the stock. The median price target for the company stands at 1,105 rupees, according to Refinitiv data, indicating a lack of confidence in a rapid recovery.
Tech Mahindra’s current predicament reflects the broader challenges faced by the IT services industry in India and globally, as economic uncertainties continue to impact client spending decisions. The company’s focus on the communications sector, while historically profitable, has also exposed it to the volatility of the telecom industry, which has witnessed strategic shifts and cost-cutting measures.
To navigate these turbulent waters successfully, Tech Mahindra may need to adopt strategic measures to diversify its revenue streams, explore new business opportunities in emerging technologies, and focus on creating operational efficiencies to safeguard its margins. As the market conditions evolve, investors and industry experts will closely watch the company’s performance and management’s response to assess its ability to weather the ongoing economic challenges and emerge stronger in the long run.
It remains to be seen how Tech Mahindra will chart its course in the coming quarters, but proactive measures and prudent decision-making will be crucial in overcoming the current headwinds and positioning the firm for sustained growth and success in the future.
