Tech Mahindra dips 4% on margin disappointment in December earnings

In the past one month, the stock has underperformed the market by falling 19 per cent as against a 1.7 per cent rise in the S&P BSE Sensex.

Shares of Tech Mahindra dipped 4 per cent to Rs 1,444 on the BSE in Wednesday’s intra-day trade after the IT firm's earnings before interest and tax (ebit) margin declined by 40bps quarter-on-quarter (QoQ) to 14.8 per cent in December quarter (Q3FY22) due to salary hikes, higher sub costs and lower utilization.

In the past one month, the stock of information technology (IT) consulting & software company underperformed the market, by falling 19 per cent, as compared to 1.7 per cent rise in the S&P BSE Sensex. The stock has corrected 21 per cent from its record high of Rs 1,838 touched on December 30, 2021.

In Q3FY22, Tech Mahindra’s revenues increased by 4.7 per cent QoQ in constant currency terms, while it was up 4.1 per cent in dollar terms and 5.2 per cent in rupee terms. Consolidated profit after tax grew 2.2 per cent QoQ and up 4.5 per cent year-on-year at Rs 1,369 crore. The company’s order book (net new order wins) declined 6.1 per cent QoQ to US$ 704 million, however it is fourth consecutive quarter of US$700+mn net new deals.

However, the company’s management remains confident of maintaining EBITM with an upward bias on the back of revenue growth-led operating leverage, employee pyramid rationalization, subcontracting costs optimization, increase in utilization (85-88 per cent targeted range), pricing, and offshore shift, which will offset the impact of supply-side challenges (recruitment and retention costs) and expected normalization of travel costs and SG&A expenses, analyst at Emkay Global Financial Services said in result update.

The company’s growth in BFSI vertical was impacted by furlough and it will come back in Q4. The company has started sourcing talent from 9 Tier II cities in India, as well as few near onshore centres like Romania/ Costa Rica/ Latvia / Mexico etc. The company is also looking to elevate fresher hiring around 12-13K in next 12 months. All these measures expected to ease pressure on margins. DSO days would normalised in Q4, it was higher due to shift of payments from few clients to January due to Christmas holidays, ICICI Securities said in a note.