Tech Mahindra Q3 preview: Roadmap for 15% EBIT margin outlook for FY21 eyed

Tech Mahindra, the Pune-headquartered information technology (IT) services company, is expected to post up to 3.1 per cent quarter-on-quarter (QoQ) growth in revenue in constant currency (CC) terms for the quarter ended December 31, 2019. Partial consolidation of Born Group is expected to aid revenue growth by around 50 basis points (bps) QoQ. Tech Mahindra had acquired New York-based digital transformation agency Born in November last year.

The company is slated to unveil its Q3 results on Friday, January 31.

Emkay Global Financial Services has built in a 3.1 per cent QoQ CC revenue growth with nearly 60 bps cross-currency tailwinds leading to a 3.7 per cent QoQ US dollar growth. It expects earnings before interest and tax (EBIT) margins to improve by 60bps QoQ to 17.1 per cent, supported by growth leverage and slight rupee depreciation despite headwinds from transition costs related to large deals. On year-on-year (YoY) basis, the numbers are expected to slip 211 bps as against 19.3 per cent in the corresponding quarter of the previous fiscal.

Net sales (revenue) in rupee terms are expected to increase 6.3 per cent YoY to Rs 9,508.5 crore and 4.8 per cent QoQ. Earnings before interest, tax, depreciation and amortisation (EBITDA) is seen declining 5.4 per cent YoY to Rs 1,630.4 crore. However, on QoQ basis, the numbers are projected to rise 8.6 per cent. Net profit or profit after tax (PAT) are forecast to slip 12.4 per cent YoY and 6.3 per cent QoQ to Rs 1,053.4 crore due to lower other income.

HDFC Securities expects US dollar revenue to increase by 2.7 per cent QoQ (USD 1,323mn, +2.2 per cent CC), owing to growth in Telecom (up 3.5 per cent QoQ). Enterprise growth (up 2.2 per cent QoQ) will moderate due to drop in HCI Group revenue. There was bunching up of deals in the last quarter, growth in 3Q will be led by revival in manufacturing, strong Business Process Services (BPS) and stable Banking, financial services and insurance (BFSI). AT&T deal contribution will be lower than expected but transition cost will impact margins, the brokerage added.

It expects EBIT margin to contract by 57bps QoQ to 12.2 per cent despite currency benefits on account of large deal transition cost. Net profit is expected to increase 5 per cent QoQ to Rs 986 crore.

THINGS TO WATCH OUT FOR

Revenue and margin performance (especially in the wake of transition costs related to large deals), outlook on growth in Communications and Enterprise for FY21 (the company has been suggesting a pick-up in revenue growth for FY21), margin outlook (the company has suggested its aim to target 15 per cent EBIT margins in FY21E), are some of the key factors to watch out for. Besides, Telecom vertical TCV, scope of work related to 5G, large deal pipeline in Telecom and growth in Digital portfolio, along with steps taken to bring down attrition rate will also be keenly tracked.