2021 was a noteworthy year for Tech Mahindra. In 2021, Tech Mahindra share price saw a jump of 83%.
Agreed that all stocks were on a roll last year but more than 80% gains for a bluechip stock like Tech Mahindra seem more than justified.
However, the rapid growth phase did not last long. Since the beginning of 2022, Tech Mahindra's share price has seen a sharp fall.
On a year to date (YTD) basis, it has fallen around 41%.
All IT stocks have been bleeding red this year.
But why? What suddenly changed in the IT sector that the rapidly growing sector is now falling?
Read on to find out...
The Nasdaq effect...
Since the start of this year, the global IT sector has taken a hit. The tech-heavy Nasdaq has seen a sharp fall.
The Nasdaq Composite index is the American stock index which has big tech stocks like Alphabet, Amazon, SNAP and the like.
Indian IT stocks mirror the Nasdaq index. Often, you'll see that whenever there's a fall in Nasdaq overnight, Indian IT stocks will also fall.
Take today's case for instance. The Nasdaq ended more than 2% lower yesterday. The BSE IT index is down more than 2% today.
Hence, you see the comparison. Indian IT stocks have been seeing red as global tech majors have seen a major correction.
For understanding this more, tune in to the below video where India's #1 trader Vijay Bhambwani explains how the Nasdaq is dragging Indian IT stocks.
The attrition problem
The attrition rate in the IT sector is very high. Attrition rate means the rate at which employees leaves a company.
High attrition rates mean increased manpower costs. In its Q4 results, Tech Mahindra reported an attrition rate of 24%.
Opportunity-wise, the IT sector is growing. But on the other hand, there is a shortage of talented employees. Hence, employees have multiple job opportunities.
Hence to retain talented employees, companies will have to pay more. In the post-pandemic period, more and more employees demand flexible working space.
Owing to growth prospects in the IT sector, the companies will not only have to pay more to retain, but also hire more people.
All of these reasons combined have put pressure on the margins of IT companies. And Tech Mahindra has fallen prey to this selloff.
According to brokerage houses, the companies will report lower profit margins in the future. They had raised their concerns regarding the falling margin.
Thus, even though the IT sector has fascinating growth aspects, its financial performance has not met expectations.
Tech Mahindra is no exception to this.
Interest rates are rising in developed markets like the USA. This makes the emerging markets less attractive for FIIs because risk free rate of return reduces.
Hence FIIs sell their holdings in companies operating in emerging markets like India to return to safety of dollars. The same has happened with Tech Mahindra.
FIIs have been divesting their stake in Tech Mahindra since March 2021. FII's stake stood at 39.6% in quarter ending December 2020.
The stake reduced to 34.3% by the end of March 2022. This stake sell by FIIs added insult to the injury.
How IT stocks have performed this year
Have a look at the table below which shows the performance of IT companies on a YTD basis.
What the future of Tech Mahindra looks like...
For fiscal 2021-22, Tech Mahindra reported a total income of Rs 45,758.3 crore. This is 18% higher compared to previous fiscal's income.
The total income for the quarter ending March 2022 is Rs 12,436.1 crore. Hence, there has been a rise of 7% in income compared to the preceding quarter.
However, there has been a corresponding increase in expenses too. Total expenses for fiscal 2021-22 were Rs 38,309 crore. This is 17% higher compared to last fiscal. The quarterly expenses have also gone up by 8%.
Thus, the rise in income is washed off by the rise in expenses.
However, the profits tell a different story. The profit for fiscal 2021-22 stood at Rs 5,630.1 crore. This is a sharp growth of 29% in profit compared to last fiscal.
Hence owing to high attrition rates, the company's income and expenses have suffered. A whopping 118% is noted down in employee benefit expenses section.
But the company has been able to keep a high-profit rate.
Thus, owing to market sentiments, Tech Mahindra's share price may be falling. But it has sound fundamentals to boast.
This indicates a positive sign for long-term investors.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)