Tech Mahindra shares surge to new high post Q2 results. Should you buy, sell or hold

26 Oct , 2021 By : Kanchan Joshi

Shares of Tech Mahindra surged over 6% to Rs1,622 apiece on the BSE in Tuesday's opening deals after the IT company reported a 26% year-on-year (YoY) increase in its September quarter net at Rs1,338.7 crore and expects to maintain the trajectory. As per brokerages, Tech Mahindra’s Q2FY22 operating performance was better than expectations.

“Revenue growth of 7.2% QoQcc helped Tech Mahindra deliver steady margins and was the key highlight of 2Q. Recent deal wins provide comfort on near-term growth," said Jefferies in a note.

The brokerage has upgraded the IT stock from Hold to Buy and also raised target price to Rs1,950 per share (from Rs1,425 earlier). It has also raised its revenue estimates for Tech Mahindra by 2-6% to factor in the beat and the improvement in the growth outlook for the communications and enterprise verticals.

TechM's rise in attrition, along with elevated utilization levels, resulted in a sharp 10% QoQ rise in subcontracting costs, which hit margins. “With a pickup in fresher hiring, TechM may rely more on subcontractors in the near term, which will keep these costs high. Management has indicated that despite wage pressures, TechM should be able to maintain margins at around 15% levels," Jefferies added.

Those at Emkay liked the IT major's broad-based growth, strong order intake, EBITM beat and capital payout, though, its spike in attrition to 21.2% from 17.2% in Q1FY22 remains a challenge. The brokerage has maintained its Buy rating on Tech Mahindra shares with a revised target price of Rs1,870 apiece, reflecting higher medium-term growth assumptions.

Meanwhile, another brokerage firm Motilal Oswal has a Neutral Stance on TechM as the brokerage expects a gradual improvement in EBIT margin, given the levers around productivity and cost optimization. Though, elevated operating metrics and supply-side pressures remain a risk to its margin estimates.

TECHM's huge exposure to the communications vertical remains a potential opportunity as a broader 5G rollout can lead to a new spending cycle in this space, as per the brokerages.