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Result Synopsis

Tech Mahindra (TECHM) reported weak financial performance for the quarter. The sequential revenue growth and EBIT margin were below expectation. Revenue declined by 2.4% QoQ in cc terms. (down 2.2% QoQ in INR terms, down 2.9% QoQ in USD terms), led by CME segment (down 4.9% QoQ). There was sequential decline in EBIT margin (down 206bps QoQ) on lower revenue. Employee attrition continues to moderate as LTM attrition was down ~2 percentage points QoQ to 11%.

The near term demand environment remains challenging as the clients remain cautious regarding the evolving macroeconomic situation and that is reflected in slowdown in discretionary spending and it continues to impact near term revenue performance. The continued weakness in Telecom vertical is expected to result in muted revenue growth for FY24. Falling employee attrition, improving employee pyramid and focus on better revenue mix is expected to support operating margin going ahead. We estimate revenue CAGR of 8.1% over FY23?25E with average EBIT margin of 11.5% over the period. We maintain our NEUTRAL rating on the stock with revised target price of Rs 1,190/share at 16.0x on FY25E EPS. The stock trades at PER of 25.5x/15.4x on FY24E/FY25E EPS.

Result Highlights

* Reported revenue of Rs 128.6bn (down 2.2% QoQ in INR terms, down 2.9% QoQ in USD terms). The muted performance of various verticals include Manufacturing (up 2.3% QoQ), CME (down 4.9% QoQ), BFSI (down 2.9% QoQ), TME (down 0.2% QoQ) and Retail & Transport (up 0.8% QoQ), other vertical (down 8.4% QoQ). Overall, the revenue decreased by 2.4% QoQ in cc terms.

* EBIT margin decreased by 206 bps QoQ to 4.7%, led by lower revenue and increase in Cost of Services (up 2.0% QoQ).

* Signed net new deals of $640mn vs $359mn in Q1FY24 and $716mn in Q2FY23.

* Offshore effort mix was up 30 bps QoQ to 73.4%. Total number of Active clients decreased by 3 QoQ to 1252.

* Total headcount increased by around 2,307 QoQ to 150,604. LTM attrition was down 2.0 percent points QoQ to 11%. Utilization excluding trainees was down 100 bps QoQ to 86.0%.

* The Board approved interim dividend of Rs. 12 per share.

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