Why Tech Mahindra Share is Falling

From the 61 stocks which form the BSE IT index, only 13 have shown a positive return so far in 2022.

Rest 48 are showing a negative return with losses ranging up to a whopping 67%! The biggest losers are Brightcom Group (down 67%), Xelpmoc Design (down 62%) and the hot favourite SaaS stock Tanla Platforms (down 60%).

If we compare performance of big IT companies, Wipro stands as the biggest loser (down 45%) while Tech Mahindra comes as a second close with a 43% loss.

Such has been the performance of Indian IT stocks in 2022 so far. The global tech meltdown combined with recession concerns in the US has had a severe impact on Indian IT companies.

Otherwise, how often do you see bluechips and fundamentally strong stocks like Wipro and Tech Mahindra erode half of their market value.

IT stocks are known for being sensitive to the overall economic climate, and this time is no different.

While there has been some good news lately, including the positive GDP numbers and an improvement in margins in most recent quarter, these positive signs have not been enough to lift the market.

Recently, we wrote about why Wipro shares are falling.

Today's let's take a look at the primary reasons behind Tech Mahindra's downfall.

#1 Recession concerns

A number of countries are currently experiencing slowdowns. This has caused companies to cut back on their spending on technology, which is hurting both hardware and software companies in India.

The IT sector remains sensitive to the US and European markets, as they contribute to around 86% of their revenues, according to a CRISIL report.

As the US Federal Reserve ramps up its fight against decades-high inflation, a growing number of economists predict a US recession within the next 12 months.

This has hurt sentiment and companies like TCS, Infosys, Wipro among others who depend on demand for IT services for their revenue generation, have seen a sharp fall.

The top IT companies including Wipro, Infosys, and Tech Mahindra have reportedly revoked offer letters given to students after delaying their joining by nearly three-four months.

TCS has postponed variable pay to its employees while Infosys has cut it to 70%. Wipro on the other hand has deferred it completely.

Experts are now predicting that the momentum in the Indian IT industry would slow down further.

#2 Attrition

Another concern for Tech Mahindra is high attrition rates. Most Indian IT firms have reported an employee attrition rate of more than 20%.

For the most recent September 2022 quarter, Tech Mahindra reported a decline in attrition rate to 20%, down from 22% in the April-June period.

Prior to this drop, Tech Mahindra saw a steady rise in the earlier five quarters.

#3 Tech Mahindra's muted quarterly performance

For the September 2022 quarter, Tech Mahindra reported a 4% year-on-year (YoY) fall in consolidated net profit to Rs 12.9 bn.

Revenues rose by 21% to Rs 131.3 bn. The company's operating profit fell 0.6% to Rs 19.8 bn.

New deal wins for the quarter came in at US$ 716 m, lower than US$ 802 m a quarter ago.

The board of directors recommended a 360% dividend to shareholders amounting to Rs 18 per share. Tech Mahindra is among the companies which have shown fastest growth in dividend payouts.

While the quarterly performance was muted, it should be noted that brokerage houses were predicting a fall in profit. So these were the primary reasons why Tech Mahindra shares are under pressure.

A couple months ago, we wrote about why Tech Mahindra was under pressure and explained these reasons in detail. You can check it out here: Why Tech Mahindra Share Price is Falling.

Equitymaster's Technical View on Tech Mahindra

We reached out to Brijesh Bhatia, editor of premium recommendation service Fast Profits Report, on what he has to say about Tech Mahindra.

Here's Brijesh:

• The IT index has corrected 33% from its all-time high of 39,446 while Tech Mahindra has corrected 48%.
  
  In the last 5 months, the IT index is consolidating in the range and is in process of a bottom formation.
  
  I recorded a video for the best sectors to buy this Diwali (Samvat 2079), and the IT index was one of them. You can watch the video here: Diwali Picks for Samvat 2079.
  
  Though Tech Mahindra has corrected 48% to the low of Rs 908, the stock has witnessed a faster reversal too.

Tech Mahindra Weekly Chart

 

• The stock has found its lost ground in the demand zone of Rs 850-950.
  
  Technically, the stock is in a sweet spot for investors are we are witnessing multiple bullish structures on weekly chart.
  
  The Bullish Bat harmonic pattern (marked blue) indicates the reversal from the Rs 908 is the medium-term bottom on the chart.
  
  The slope of 200 WEMA (Weekly Exponential Moving Average) is trending bullish and the recent fall halted at an average. The reversal from the long-term moving average indicates a new trend is emerging in the stock.
  
  The bullish pattern within the demand zone on the weekly chart is a sign of a primary bullish trend.
  
  The 50 WEMA may act as a minor hurdle for bulls; above which the bullish trend may accelerate.
  
  Technically, the reversal pattern and bottoming formation are in progress, and it may fail on the breach of Rs 850.
  
  Investors should keep in mind the underperformance of Nasdaq as the Indian IT index follows the footsteps of Nasdaq.

About Tech Mahindra

Tech Mahindra is an Indian multinational IT services and consultancy company.

Established in 1986 as a joint venture with British Telecom, the company is a part of the prestigious Mahindra group. Unlike its parent organisation, which is headquartered in Mumbai, Tech Mahindra has its headquarters in Pune with several offices across the world.

To know more about the company, check out Tech Mahindra's financial factsheet and its latest quarterly results.

You can also compare Tech Mahindra with its peers.

Tech Mahindra vs Infosys

Tech Mahindra vs TCS

Tech Mahindra vs WIPRO

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...