Tech Mahindra shares are cheap despite the earnings disappointment, says a research report

One of India's top five technology services companies, Tech Mahindra, reported a rather disappointing set of earnings on Friday. However, the stock is still cheap and it can gain another 15% in the next one year, says a report from Kotak Institutional equities, which cut the estimate for the company's earnings per share by up to 22%.

Tech Mahindra has reported a drop of 4.3% in dollar revenue in Jan-March 2020, while the net profit fell 32%, compared to three months ago. The company has announced a final dividend of ₹5 per share.



Tech Mahindra derives a large share of revenue, about 8.7%, from business process outsourcing (BPO) unit, which has 46,816 employees, mostly from voice services. "Transition to work-from-home has lagged with customers refusing to give permissions. Work-from-home (WFH) stands at 75% for BPO headcount outside India. The low WFH led to missed revenues," according to Kotak.

However, the stock is still attractively valued. "We now forecast revenue decline of 5.1% in FY2021 compared to 1.1% earlier in US$ terms... We forecast EPS decline of 22.8% in FY2021 and an equally swift recovery with 35.6% growth in FY2022," the report said while it kept a 'Buy' rating and a target price of ₹630, about 15% higher from Thursday's (April 30) closing price.

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