Why Tech Mahindra Shares Plunged 14% Today

Tech Mahindra shares fell as much as 14 per cent in opening trades on Wednesday as the outsourcer missed profit estimates in the March quarter. Most frontline IT stocks fell tracking Tech Mahindra’s weak earnings. The stock was the top loser in the 50-share Nifty index.

 

Here’s why Tech Mahindra shares plunged today:

1) Tech Mahindra, India’s fifth largest IT services company, on Tuesday reported a 39 per cent sequential drop in net profit for the January to March period. Tech Mahindra’s Q4 net profit of Rs 472 crore was sharply lower than the Rs 724 crore number estimated by analysts polled by NDTV.

2) Tech Mahindra’s Q4 operating or EBIT margin dropped 530 basis points sequentially to 12.4 per cent.

3) Analysts attributed the slump in profitability to salary hikes and Tech Mahindra’s acquisition of Lightbridge Communications Corporation (LCC), the US-based global network services provider the company acquired for $240 million in November 2014.

4) Tech Mahindra’s constant currency dollar revenue growth also disappointed the Street. The company’s dollar revenue declined by 1.2 per cent sequentially, lagging its peers by a wide margin. In the March quarter, TCS had reported a 1.6 per cent sequential growth in dollar revenues, HCL Tech grew at 2.7 per cent and Wipro posted a 1.2 per cent growth. Only Infosys posted weaker number, with its dollar revenue (cc) falling 0.4 per cent in the March quarter.

5) Revenues were hit because of weakness in telecom and manufacturing verticals, analysts said.

Brokerages on Tech Mahindra:

CLSA maintained its “sell” call on Tech Mahindra (target Rs 550) citing weak Q4 numbers. Macquarie retained its “neutral” call (target Rs 625).



 

Credit Suisse retained its “outperform” call though it cut its target on Tech Mahindra to Rs 775 from Rs 825. Tech Mahindra is poised for decent revenue growth in future, the brokerage said.

As of 09.20 a.m., Tech Mahindra shares traded 10 per cent lower at Rs 575.50, underperforming the broader Nifty, which traded 0.7 per cent lower.