Tech Mahindra Q4 net profit down 7% to Rs 1,132 crore, revenue up 10%

Barring telecom, growth in other verticals has been dismal

Tech Mahindra’s (TechM’s) March 2019 quarter (fourth quarter, or Q4) results came in below D-Street expectations. The company reported 0.6 per cent sequential fall in consolidated revenue to Rs 8,892 crore (10.4 per cent up year-on-year, or YoY), against consensus estimates of Rs 9,036 crore. Net profit declined by 5.9 per cent quarter-on-quarter (QoQ) to Rs 1,132 crore, which was below estimates. On a YoY basis, net profit was down 7.3 per cent.

While the telecom segment, accounting for over 40 per cent of the company’s revenue, clocked healthy sequential growth of 4.4 per cent, the manufacturing segment declined 0.9 per cent. The latter has around 20 per cent share in TechM’s revenues.

“Projects in communication that have driven growth include optimisation initiatives, cloud migration and digital enablement, and 5G labs and trials.  Last year, it was almost flat. This year, the vertical should lead over all verticals, in terms of growth,” said C P Gurnani, managing director and chief executive officer, TechM.

The company reported new deal total contract value of $408 million, an all-time high for the company. Around half of the deal win has come in through the communication vertical.

Deferral in client spending pulled down TechM’s manufacturing growth and seasonality affected the retail segment, said the management. Revenue from the retail segment was down 4 per cent QoQ in Q4.

“Certain deferrals and project-specific issues caused the decline in growth. We are building a strong funnel in the enterprise business. Operating profit margins (earnings before interest, taxes, depreciation, and amortization, or Ebitda) have declined, from 19.3 per cent to 18.4 per cent sequentially. Overall, we are focused on improving operating metrics, converting it to cash, and providing it to shareholders,” said Manoj Bhatt, chief financial officer, TechM.  He further added that the company made certain provisions for doubtful debts during the quarter which affected margins.

The project deferrals are expected to recover by the second quarter of 2019-20 (FY20).

The company’s geographical performance, too, remained dismal. Revenue from the US and Europe fell by 1.6 per cent and 0.5 per cent, respectively. This can be attributed mainly to the subdued performance by manufacturing and the retail segments.

On the cost front, TechM’s sub-contracting charges, as a percentage of operating revenues, expanded sharply by 101 basis points (bps), from 12.2 per cent in December 2018 quarter to 13.2 per cent in Q4. This, along with higher other operating expenses, led to a 70-bps QoQ contraction in Ebit margin to 15.4 per cent. Going ahead, maintaining Ebit margin could be tough.  “Given the high attrition rates, higher base of 2018-19, or FY19 (Ebit margin is up 320 bps to 15 per cent in FY19) and macro-level issues on the supply side, TechM could see some margin pressure,” says Amit Chandra, analyst at HDFC Securities.

In fact, TechM’s attrition rate of 21 per cent is the highest in the industry. Infosys had reported 20.4 per cent attrition rate in its March quarter results. Higher attrition rate typically warrants high employee and training costs.

Analysts foresee TechM’s growth to be likely around 7.5-8 per cent in FY20 and 2020-21, which is significantly below the top information technology players. Thus, balancing growth and margins are likely to be a tough for the company. This gives almost no room for valuation upside for TechM’s stock, say analysts. Thus, the stock that currently trades at 14 times FY20 estimated earnings, could see some pressure on Wednesday, they add.

The management also said that it has moved from its cautious approach to e-governance and government-related projects and is expected to be more active in the space in India. TechM announced their biggest defence order worth Rs 300 crore to enable digital transformation for the Indian Navy as part of the armed forces secure access card project.