Tech Mahindra Q4 net dips 31% to Rs 588 cr; LCC restructuring hits margins

Revenue rises 9%

IT services major Tech Mahindra said fourth quarter profits declined by 31 per cent to Rs 588 crore as it saw project cancellations in its communication business amidst restructuring of Lightbridge Communications Corporation (LCC), a US firm it acquired in 2015.

Margins, calculated on sales minus revenue, stood at 12 per cent, the lowest in two years and the weakest among the top five Indian IT services firms. Tech Mahindra saw revenues grow 8.9 per cent to Rs 7,495 crore in the January to March quarter.

Market analysts maintained a 'Buy' rating for Tech Mahindra despite the dip in profitability in fourth quarter.

"EBITDA margin performance was way below expectation, 12.0 per cent versus our estimate of 15.5 per cent, led by LCC restructuring, wage hike and higher SG&A expenses. We maintain our positive view based on possible recovery in telecom, bottoming out signals in LCC, continued growth in enterprise business led by BFSI and Manufacturing and margin expansion with turnaround of lower margin acquisitions," wrote Amit Chandra and Apurva Prasad, analysts at HDFC securities, in a note.

Tech Mahindra said it saw two contract cancellations during the quarter as it was looking to focus on more high-value projects.

In the same period last year, the fifth largest IT services firm reported profits of Rs Rs 876 crore on revenues of Rs 6,883 crore.

Larger peers of Tech Mahindra such as Infosys, TCS, Wipro, reported single-digit growth in Q4 on the back global uncertainties. Industry body Nasscom has delayed its growth forecast for this fiscal by a quarter citing uncertainties. Indian IT services players see a tough time ahead with decline in traditional technology services and increasing client demand for services through digital technology such as cloud. HCL, however, surprised the Street with a higher number for Q4 of last fiscal.

Tech Mahindra, however, expects improvements in profitability from the first quarter of this fiscal once the LCC business settles down.

Vineet Nayyar, Vice Chairman, Tech Mahindra, said the IT services industry including Tech Mahindra has seen "major shift" and consistent change in demand patterns. "Most businesses are also battling the geopolitical uncertainties and as a Digital Transformation company, we see these as huge opportunities in the future. Our clients are approaching us with more problems to solve than ever before - that is definitely a happy problem to deal with," said Nayyar.

For the whole year (FY17), the company's net profit dropped 6 per cent to Rs 2,813 crore, while revenues grew 10 per cent to Rs 29141 crore.