TechM: Volatility to go on in telecom, margins

Company believes these two factors will improve over the next few quarters

Muted growth in dollar revenues (up 0.4 per cent sequentially to $1,015 million) and lower-than-expected Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin were key disappointments in Tech Mahindra (Tech M)'s December quarter results. Cross-currency headwinds, along with continued decline in communications (telecom) revenues (51 per cent of total revenues), hit top-line in the quarter. A 1.7 per cent fall in revenues from its key market of the US, too, pulled down overall revenue growth. Some pressure was offset by the enterprise business, which grew well on good traction in retail, manufacturing, and health-care verticals. Higher number of furloughs curtailed Ebitda margin gains at 35 basis points to 16.9 per cent, which came lower than Bloomberg consensus estimate of 17.2 per cent. Cost rationalisation, improving employee utilisation, and a weaker rupee versus the dollar provided some support to the margins.

Further, management commentary remained cautiously optimistic. In a post-results call, it indicated communications vertical could take a couple of quarters to recover on elongated decision-making by clients. Analysts believe the stock could remain under pressure in the near term.

More, the share of revenues from its top-ten clients has been falling consistently from 51 per cent in the September 2014 quarter to 40 per cent this quarter; it was 43 per cent in September 2015 quarter, and impacting overall revenue growth. Madhu Babu, analyst at Centrum Broking, believes weakness in top clients is a concern, and expects the company to post flat organic growth this financial year. While its acquisitions will drive revenues, they will continue to weigh on margins. Management believes synergies from consolidation of LCC acquisition will reflect in its numbers over two quarters. It remains confident of maintaining margins at current levels and gradually improving them.

In rupee terms, Tech M posted broadly in-line numbers for the quarter. Revenues grew 1.3 per cent sequentially to Rs 6,701 crore, a bit lower than Bloomberg consensus estimate of Rs 6,749 crore. Its net profit dropped 3.3 per cent sequentially to Rs 759 crore, behind expectations of Rs 771 crore. The fall was largely on lower ‘other income’ in the December quarter. This metric was high in the base quarter ended September on higher dividends from subsidiaries that boosted net profit. Lower tax rate, as well as cost savings, partly limited the impact on the bottom line.