Analysts believe that the leadership change will have little impact on the company’s earnings fundamentals in the medium term and that reviving growth fundamentals will be a gradual process.
The Street has welcomed the long-awaited announcement of Tech Mahindra Ltd’s succession.
Mohit Joshi was named managing director and chief executive officer designate by the company on Friday. He will succeed CP Gurnani, who is set to retire on December 19, 2023. Joshi’s appointment will be for five years. Joshi comes to Tech Mahindra from Infosys Ltd, where he was the head of global financial services & healthcare, and software businesses.
With this appointment, one of Tech Mahindra’s investors’ concerns has been alleviated. In response, shares of the IT services provider rose 8.5% in early trade on Monday on the National Stock Exchange. But, before getting carried away by the stock’s initial euphoria, keep in mind that a revival in the company’s earnings performance is critical for the stock to see a sustained up move. That may take some time.
The market may react positively in anticipation of the new CEO’s announcement of a new strategy to revitalize TechM’s performance. However, we do not believe that the leadership change will have a material impact on the company’s earnings fundamentals in the medium term (2-3 years), and reviving growth fundamentals is more likely.
Remember that Tech Mahindra’s earnings performance in comparison to tier-1 IT competitors has been dismal. As a result, the stock has been punished. Tech Mahindra shares have dropped nearly 24% in the last year, outperforming the sector index Nifty IT’s 18% drop. In terms of valuation, Tech Mahindra stock has been trading at a discount to its large-cap peers.
According to Nuvama Research analysts, the new CEO would have a lot of work to do to turn around TechM’s operations. “Mr. Mohit Joshi’s appointment clearly signals a change in strategy for TechM given his non-telecom background,” according to the Nuvama report. As a result, Nuvama analysts believe the stock will continue to underperform peers until earnings catch up.
Meanwhile, analysts are concerned that the appointment of an external CEO at Tech Mahindra will result in exits at the top management level. This could mean another delay in earnings recovery, keeping the stock’s performance under control.