Tech Mahindra stock soars on CEO appointment, but beware the euphoria
2 min read . Updated: 13 Mar 2023, 10:42 AM IST
Premium- The leadership change may not materially change the earnings fundamentals of the company in the medium term and reviving growth fundamentals is likely to be a gradual process, analysts say
The Street has welcomed much-awaited clarity on IT giant Tech Mahindra Ltd's succession announcement.
On Friday, the company said that it has appointed Mohit Joshi as managing director and chief executive officer designate. He will take over following the retirement of CP Gurnani slated on 19 December 2023. Joshi's tenure will be for a period of five years. Note that Joshi will join Tech Mahindra from another tech giant Infosys Ltd, where he was the head of global financial services & healthcare and software businesses.
With this appointment, one of the worries for Tech Mahindra investors is out of the way. In reaction, shares of the IT services provider rallied 8.5% on the National Stock Exchange in Monday's early trade. But before one gets carried away by this initial euphoria in the stock, remember that a revival in the company's earnings performance is crucial for the stock to see a sustained up move. And that may take time.
"Market may react positively in anticipation of a new strategy roll-out by the new CEO to revive the performance of TechM. However, we do not believe that the leadership change can materially change the earnings fundamentals of the company in the medium term (2-3 years) and reviving growth fundamentals is likely to be a gradual process," said analysts at ICICI Securities Ltd in a report dated 12 March.
Remember, Tech Mahindra's earnings performance compared to tier-1 IT competitors has been unimpressive. Consequently, the stock has been punished. In the last one year, Tech Mahindra shares have declined by nearly 24%, steeper than sector index Nifty IT's around 18% fall. On the valuation front, the Tech Mahindra stock has been trading at a discount to large-cap peers.
According to analysts at Nuvama Research, the new CEO would need to do a lot of work to turn around TechM’s operations. "The appointment of Mr Mohit Joshi clearly signals a change in strategy for TechM given his non-telecom background," added the Nuvama report. So, Nuvama analysts feel that the stock may continue to underperform peers until earnings catch-up.
Meanwhile, what also worries analysts is that the appointment of an external CEO at Tech Mahindra might lead to exits at the top management level. This could mean a further delay in earnings revival, keeping the stock's performance in check.