One-offs aid Tech Mahindra results

Management confident, valuations are inexpensive

Higher other income, foreign-exchange gains and tax savings aided Tech Mahindra's earnings in December quarter (Q3), which grew a whopping 32.8 per cent sequentially to Rs 856 crore, coming way ahead of Bloomberg consensus estimate of Rs 758 crore. However, this may not be sustainable as earnings are driven by a surge in non-core, unpredictable income streams mentioned above. High growth in earnings nearly eclipsed healthy revenue growth in Q3. One-month revenue from Target acquisition, coupled with strength in enterprise and telecom verticals, led to a 5.4 per cent sequential growth in constant-currency revenue. This is highest growth registered by the top-five listed entities in Q3. Constant-currency revenue moved by minus 0.3 per cent to plus 3 per cent for larger peers such as Tata Consultancy Services, Infosys, Wipro, and HCL Technologies.

As expected, Tech Mahindra's underlying profit margin expanded 90 basis points to 12.4 per cent on improving situation in attrition and utilisation rates. A reversal in a one-time expense incurred in the preceding quarter also rubbed off favourably on underlying profit margin and offset unfavourable cross-currency movements due to costlier dollar. Going ahead, there are a few margin levers at the company's disposal. These include profitable turnaround of acquisitions such as LCC, lower usage of sub-contractors, and cost efficiencies. These should aid margins in the future, as well. However, any strict visa norms (in the US) could elevate costs and have a bearing on margins. "The best way to deal with higher cost pressures on the visa issue is to discuss with clients," says C P Gurnani, chief executive officer and managing director, Tech Mahindra.

Stock trades at 12 times FY18 estimated earnings, much lower than its historical average one-year forward price-to-earnings ratio of 15. Also, the management is positive on future growth. The Street will watch out for turnaround of LCC. Analysts could revise upwards their full-year estimates for the company. Given its inexpensive valuations, most analysts are positive on Tech Mahindra.