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New CEO has good credentials; no significant change in earnings fundamentals in medium term

Tech Mahindra (TechM) has announced appointment of Mohit Joshi as MD & CEO: Mr. Mohit Joshi will take over after the existing CEO and MD, Mr. CP Gurnani, retires on December 19, 2023. Mohit Joshi will join well before that date to allow sufficient transition time, as per TechM. He may join in June 2023 given Infosys has announced his resignation effective March 11, 2023 and that he will be on leave from this date and his last day would be June 9, 2023 at Infosys.

New CEO Mr. Mohit Joshi held key leadership position at Infosys: Mohit Joshi will join Tech Mahindra from Infosys, where he was the head of Global Financial Services & Healthcare and Software businesses, which included Finacle (the banking platform) and AI / Automation portfolio. He has over two decades of experience in enterprise technology software and consulting space and has worked with the largest corporations in the world in driving digital transformation and building thriving businesses. Mohit also led sales, operations and transformation for Infosys and held executive responsibility for all large deals across the company. He was also responsible for the company’s internal CIO function and Infosys Knowledge Institute. Mohit Joshi has lived and worked in Asia, America and Europe, and currently lives in London.

We continue to maintain REDUCE rating on TechM because we believe the company has room for improving its digital capabilities (Table 1) and in order to revive growth it will have to invest in building digital capabilities. Therefore, we assume modest US$ revenue CAGR of 8.3% and believe EBIT margins may remain range-bound, around 12-13%, over FY23E-FY26E (consensus: 13-14%) vs management’s aspiration of improving margins to 14-14.5% in the medium term. Additionally, TechM’s wallet share in top-5 clients has been reducing for the past four quarters and we believe this is likely to continue over the next two quarters as well due to increased level of automation and cost-reduction programmes undertaken by these clients. We continue to value TechM at 14x FY26E EPS of Rs76 (discounted back 1-year with WACC of 12%) to arrive at our 12-month target price of Rs971 (unchanged), implying 9% potential downside. The stock is currently trading at 16x/14x on FY25E/FY26EPS, respectively. Market may react positively in anticipation of new strategy roll-out by the new CEO to revive the performance of TechM. However, we do not believe that the leadership change can materially change the earnings fundamentals of the company in the medium term (2-3 years) and reviving growth fundamentals is likely to be a gradual process.

What will change our view: If Mr. Mohit Joshi focuses on making significant investments in building superior digital capabilities, we could see margins remaining subdued in the medium term (2-3 years). However, these investments could materially increase the topline estimates in our view. Additionally, given Mohit Joshi’s large deal leadership at Infosys, if he is able to revive TechM’s large deals engine (increase in number of >US$500mn deals) then that would lead to an increase in topline estimates.

Risks due to leadership change: Appointment of external CEO at TechM might lead to a churn at the top management level which could cause subdued performance in the near term. Similarly, Infosys is also subject to a churn at the top management level given two key leaders – Mohit Joshi and Ravi Kumar (joined as CEO of Cognizant) have exited the company in the last three months

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