Tech Mahindra Q2 preview: Enterprise segment may impact overall growth

At the bourses, Tech Mahindra has performed better than the benchmark S&P BSE Sensex. The stock has gained a little over 1 per cent during Q2FY20 as against nearly 2 per cent rise in the Sensex

A sharp moderation in the growth of the Enterprise segment is likely to keep overall growth trajectory of Tech Mahindra (TechM) for the September 2019 quarter in check. While headwinds from wage hikes and visa costs are largely behind, up-front costs incurred in new deal execution should put pressure on margins for Q2FY20, say analysts. The IT services company is slated to release its September quarter results later in the day.

While TechM’s growth in Communications vertical (40 per cent of revenues) has been recovering in recent quarters, a sharp moderation in growth in the Enterprise segment has kept overall growth in check. Interestingly, TechM was the only Tier-I company to see a moderation in revenue growth in FY19 vs. FY18, note analysts at Emkay Global Financial Services.

Nirmal Bang Securities has factored in 2.3 per cent QoQ CC revenue growth and nearly 65 basis points (bps) cross-currency headwind leading to a growth of 1.6 per cent in US dollar terms. On YoY basis, the company's growth is projected to grow 4.1 per cent. In rupee terms, net sales (revenue) is estimated at Rs 8,911 crore, up 3.3 per cent YoY and 3 per cent sequentially. 

EBITDA is expected to decline 14.9 per cent YoY to Rs 1,376.8 crore. On sequential basis, the numbers are expected to grow 4.8 per cent. EBIT is seen at Rs 1,053.5 crore, up 6 per cent QoQ and down 20.4 per cent YoY. Nirmal Bang expects Tech Mahindra to post an adjusted PAT (profit after tax) of Rs 871.6 crore, down 8.4 per cent QoQ and 15.7 per cent YoY.

At the bourses, shares of Tech Mahindra have performed better than the benchmark S&P BSE Sensex. The stock has gained a little over 1 per cent during the three-month period as against nearly 2 per cent decline in the Sensex. The S&P BSE IT index, on the other hand, has gained mere 0.10 per cent, ACE Equity data shows.

Analysts at ICICI Securities expect US dollar revenues to grow a mere 0.8 per cent QoQ to $1,257 million on the back of weakness in enterprise segment driven mainly by auto, banking and healthcare segments. "Rupee revenues may grow 2.2 per cent QoQ to Rs 8,844 crore. EBITDA margins could expand 120 bps QoQ to 16.4 per cent led by absence of wage hike & visa costs, rupee benefit partly offset by cross currency impact," they wrote in a results preview note.

Centrum Broking expects Tech M’s revenues to grow by 2.1 per cent QoQ in constant currency in Q2FY20. "Telecom vertical would drive growth while Enterprise vertical would remain stable on a sequential basis. Cross currency would be a headwind of 70bps for the quarter. Hence, reported USD revenues would grow by 1.4 per cent QoQ," it said.

Any cuts in the revenue growth guidance as the global macro turns softer, outlook for enterprise business and commentary on attrition are the key things to watch out for. That apart, telecom sector revival, 5G capex and rollout and further margin expansion levers remain key monitorables.

At 10:16 am, the stock of Tech Mahindra was trading 0.41 per cent higher at Rs 772.55 on the BSE.