Q3 results: New technology focus, margin gains to drive Tech Mahindra

Tech Mahindra joined larger peers in reporting better than expected performance for the quarter ended December 2017. The company reported 2.5 per cent sequential growth in dollar revenue to $1.2 billion.

In addition to business growth, cross-currency tailwinds boosted the top line. The growth was led largely by the enterprise segment which grew 4.2 per cent and the North American region, 47 per cent of revenue and which grew 6.2 per cent.

Within the enterprise segment, technology, media and entertainment was the outlier, with growth of 12.9 per cent. The business process outsourcing segment also saw good growth of 20 per cent, with better execution, leveraging of technology and automation.

Its largest vertical, telecom, 45 per cent of revenue, continued to lag overall company growth, with improvement of only 0.4 per cent. In fact, growth in the past eight quarters on a cumulative basis has been a negative 0.5 per cent. Revenue from the segment has been stagnant in a narrow band of $507-528 million since the September quarter of FY16, dragged down by acquisitions of LCC and Comviva.

While the company has shed low-yielding businesses and is focusing on high-value services, growth will depend on spending by clients on new technologies and the pace of adoption.

Though the company indicated that both verticals will grow, the management was more guarded about the prospects, unlike peers which have clearly indicated that FY19 will be much better than FY18. The company is betting highly on new technologies such as the internet of things

On the operating front, led by reduction in employee count, higher utilisation and business mix, the company reported a 180 basis point growth in operating profit margin to 16.3 per cent. While utilisation improved from 81 per cent to 83 per cent, sale of low-yielding business and improvement in portfolio (acquisitions) companies helped. Improving of operating performance and lower tax rates helped improve net profit by 12.4 per cent to Rs 9.43 billion, above the estimate of Rs 8.82 bn.

Margin gains will depend on the ability to improve the offshore-onsite mix, automation and delivery model, which has to be balanced by the salary hikes due in the first half of FY19. The company trails its larger peers on the margin front.