On April 17, Tech Mahindra Ltd fell more than 7% in the morning trade as global brokerage firm Citi lowered the stock to “sell” from “neutral”, reducing the target price to Rs 955 from Rs 1,100.

This is due to increased risks to growth in the communications vertical, resulting in about 40% of the company’s revenue.

There are near-term challenges, and a negative catalyst watch is already in place, which may be exacerbated by macroeconomic factors, the brokerage said in its latest report. Operating deleverage may lead to lower margins than what consensus expectations are. Lastly, while there are positives associated with leadership change, they may take some time to materialise.

Citi said the valuations are at 16x 1-yr forward cons EPS – risk-reward looks unfavourable. They lowered the target multiple to 15x (17x earlier) to factor in these risks, a new TP of Rs 955 (Rs1100 earlier). Their FY24E/FY25E EPS is 7% to 14% below consensus.

In its third quarter, Tech Mahindra stated revenues from its top 5 clients declined amid restructuring in some clients. Though management expects to stabilise by the fourth quarter, the challenges could persist, showing macroeconomic uncertainty.

The brokerage firm added that the challenges across multiple verticals, like discretionary cuts and deferrals, vendor consolidation, and pricing pressure, could negatively influence growth.

Tech Mahindra has charted numerous margin levers, comprising lowering sub-contracting costs, spinning off or shutting down non-strategic businesses, correcting the offshoring mix, executing automation and delivery excellence measures, and leveraging synergies with portfolio firms. The margin improvement pace could be slower than predicted amid growth challenges and the likelihood of discretionary costs returning.

At 9.35 am, the stock traded 7.3%, down at Rs 1,007.25 on the National Stock Exchange.