Tech Mahindra Ltd. opened on a strong note on Tuesday, October 1st, rising up to 3% after CLSA, a global brokerage firm, upgraded the IT company’s stock from ‘Hold’ to ‘Outperform.’ This comes just ahead of its upcoming earnings report, highlighting a positive outlook for the company’s financial performance and potential future growth.

Key Highlights from the CLSA Report

• Rating Upgrade: CLSA shifted its recommendation on Tech Mahindra to ‘Outperform’ from ‘Hold’.
• Price Target Increase: The brokerage raised its price target by 8% to ₹1,749, up from its previous target of ₹1,625.78.
• Upside Potential: This revised target suggests an additional 11% upside potential from the current levels.

Reason for the Upgrade

According to CLSA, Tech Mahindra is already showing signs of EBIT (Earnings Before Interest and Tax) margin expansion, which has been a key factor driving this upgrade. The next major milestone for the company would be enhancing its order book, a critical indicator of future revenue.

However, the brokerage firm does not anticipate a broad-based growth revival until FY26. The report highlights that the financial services, healthcare, and manufacturing sectors will likely lead the charge in Tech Mahindra’s growth over the coming years.

CLSA believes that the company’s EBIT margin target of 15% by FY27 is within reach, given the recent positive momentum in the margins, which could lead to a further rerating of the stock.

Market Sentiment & Analyst Consensus

Despite the recent upgrade, the market sentiment remains mixed. Last month, Citi assigned a ‘Sell’ rating on Tech Mahindra, with a price target of ₹1,260, citing a challenging growth environment for the company.

Out of the 44 analysts covering the stock:

• 18 Analysts have a ‘Buy’ rating.
• 11 Analysts recommend ‘Hold’.
• 15 Analysts have a ‘Sell’ call.

The consensus rating implies a potential downside of about 4% from the current levels.

Stock Performance Snapshot

• On Monday, Tech Mahindra shares closed 1.94% lower at ₹1,578.
• Year-to-Date Performance: The stock has gained nearly 22% so far in 2024.
• 12-Month Performance: Over the last year, Tech Mahindra has surged by 30%.

Conclusion: Positive Momentum with Cautious Optimism

The CLSA upgrade signals renewed confidence in Tech Mahindra’s profitability trajectory and growth potential, driven by margin expansion and sector-specific opportunities. However, a broad-based recovery is expected to take time, with significant gains projected over the next few fiscal years. As the company approaches its earnings release, market participants will be closely watching for any updates that could influence sentiment further.

Disclaimer: The views expressed in this blog are for informational purposes and do not constitute financial advice. Investors are advised to conduct thorough research and consult certified financial experts before making any investment decisions.