Riding a wave

In Tech Mahindra’s recent buyback, promoter entity Mahindra & Mahindra tendered shares worth ₹4.46 billion

Until April last year, Tech Mahindra’s stock was catching up with its counterparts such as Infosys and Tata Consultancy Services (TCS). Plagued by issues such as margin contraction due to higher-than-expected selling, general and administrative (SG&A) expenses and slow recovery in telecom segment, Tech Mahindra’s results failed to garner investors’ attention. But things have changed since then for the company. Tech Mahindra’s stock has gone up by 31% in FY19 hitting a record high of Rs.840 on February 21, when the board announced its first-ever buyback of Rs.950 per share.

The buyback offer per share was 16% higher than the closing price of Rs.820.40 on February 21.

Of the Rs.19.56 billion buyback announced, Tech Mahindra’s promoters, directors and employees tendered shares worth Rs.6.16 billion including Anand Mahindra-led Mahindra & Mahindra, which disposed shares worth Rs.4.46 billion. As of December 2018, the promoters held 35.94% stake in the company compared to 36.01% in December 2017.

Post the buyback and recovery in the margins, analysts are bullish about Tech Mahindra’s future prospect. In the December quarter, the company reported a strong performance on margins as well as revenue front. The margins expanded to 19.26% against 16.26% in December last year driven by lower SG&A expenses, operational efficiency and higher utilisation. The revenue also rose by 15% (year-on-year) to Rs.89.43 billion due to growth in enterprise and telecom segment.

Analysts expect revenue growth to continue led by deal wins in both telecom and enterprise segment. “We expect USD revenue CAGR of 7.6% over FY18-21E led by telecom and enterprise CAGR of 4% and 10% respectively. Tech Mahindra is available on an average at 17% discount to Tier-I IT stocks,” states a HDFC Securities report.

Mutual funds also concur with the analysts. They have raised their stake from 7.39% to 9.23% over the last four quarters. ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund have increased their stake from 1.79% and 1.48% to 2.16% and 2.18% respectively during the same period. However, the foreign portfolio investors have turned cautious. After increasing their stake from 37.63% in December 2017 to 39.16% in September 2018, the foreign investors reduced their holdings to 38.54% in December 2018. First State Investments ICVC — the top FII investor in the company — reduced its stake from 4.88% to 4.62%.