Tech Mahindra in big league with 5.2% dollar sales growth in Q2

Deal wins and improved client mining drive revenues, margins expand on improved utilisation

Software services major Tech Mahindra appears to be on course to become a $5-billion company in FY15. The September quarter numbers justify the recent upgrades in the firm’s earnings estimates. Tech Mahindra is following the same strategy of deepening on existing relationships clients to drive growth. During the quarter, it also continued to add new clients. Its active clients rose from 632 in the June quarter to 649 in the September one. Improved client mining and strong growth in America across key verticals helped the company post a robust 5.2 per cent dollar revenue growth.

Tech Mahindra’s revenue growth in the September quarter has beaten the Street’s estimates by a long shot, putting it in the league of other blue-chips. Sequentially, the dollar revenues have grown 5.2 per cent to $900 million. In rupee terms, sales grew 7.2 per cent sequentially and 15 per cent year-on-year (y-o-y) to Rs 5,488 crore. The firm’s sales growth has been driven by 10 per cent growth in America, which accounts for 49 per cent of the company’s revenues, while Europe has grown four per cent. From a vertical point of view, manufacturing grew four per cent and telecom expanded eight per cent. Analysts have been seeing strong growth in the telecom vertical, given the company’s deep domain knowledge in the sector.

Operating profit rose 18.2 per cent sequentially to Rs 1,097 crore. Net profit remained flat y-o-y in rupee terms at Rs 719 crore. There was an impact on the bottom line due to a forex loss of Rs 46 crore during the quarter. Margins have expanded 220 basis points to 17.4 per cent on higher utilisation. Utilisation (ex-trainees) has improved to 76 per cent, compared with 75 per cent in the June quarter.

The Street has been estimating a scale-up in Tech Mahindra’s deal pipeline with the company bagging larger deals. In the September quarter, it bagged one $50-million deal and one $20-million deal. The percentage of repeat business was 97 per cent in the September quarter against 99 per cent in June. However, the share of the top five clients has increased to 40 per cent of revenues in September from 37 per cent in the June quarter. The share of top 20 clients in the second quarter has grown to 63 per cent from 62 per cent in the first quarter.