Tech Mahindra: Margin decline may be a thing of the past

Revenues from top 5 clients seem to have stabilised at 33%; return to growth a few quarters away

If Tech Mahindra’s June quarter performance is any indication, margin decline might be a thing of the past for the company. The company saw its operating margins collapse over the last few quarters, following the acquisition of Lightbridge Communications in 2014.

The company’s profit growth has come ahead of consensus estimates, aided by other income (foreign currency gains) and a lower tax rate on a sequential basis. During the quarter, dollar revenues grew 0.5 per cent to $989 million, while its net profit rose 43 per cent sequentially to Rs 676 crore.

Operating margins have shown surprising resilience on account of some smart management. Operating margins declined 30 basis points sequentially to 14.9 per cent, as the company cut back on its SG&A (sales and general administration) expenses, which prevented the margins from declining further. In addition, the company  improved its utilisation levels and the currency also depreciated during the comparable period.

Revenues from the top five clients appear to have stabilised, believe analysts, which has helped drive the growth in top line. While telecom revenues continued to decline sequentially, sales from the enterprise business have grown at a healthy clip. While some of the gains could have come from integration of Softgen, Emkay Global says rough calculations suggest organic sequential growth in the enterprise business would have been four per cent QoQ, which is decent. Active clients at the end of the quarter stood at 770.

While attrition remained flat sequentially at 19 per cent, utilisation (including trainees) improved to 74 per cent from 71 per cent in the April quarter. Excluding trainees, utilisation improved 100 basis points sequentially to 75 per cent. Revenues from the Americas rose 20 basis points sequentially to 47.7 per cent, while Europe contracted 130 basis points to 29.4 per cent. Revenues from the rest of the world improved marginally.

While the share of top clients continues to decline sequentially, the share of top five clients seems to be stabilising at 33 per cent levels. Analysts believe  further deterioration in margin is not likely, though the company might take a couple of quarters to kick-start topline growth.