)
Acquisitions, cross currency movement, wage hikes and soft quarter impacted Tech Mahindra’s results for the three months ending March 2015. Tech Mahindra disappointed the Street, as consolidated net profit for the quarter at Rs 472 crore was down 23 per cent versus Rs 614.2 crore in the year-ago period, and came way below Bloomberg consensus estimates of Rs 724 crore. On a quarter-on-quarter basis, net profit (prior to special adjustments) slipped 39 per cent from Rs 776.8 crore.
The firm’s top line performance though was in line, it was the margin and profit numbers that were disappointing. A 23-per cent drop in profit after tax (PAT) on a year-on-year basis was also the worst when compared to the top players of the Indian IT services industry. TCS’ profit (excluding the bonus payout) was up 11.5 per cent, Infosys was up by 3.5 per cent, Wipro and HCL Tech reported a growth of 2 per cent and 3.6 per cent, respectively.
Margins were impacted by 530 basis points. Of this, 200 basis points (bps) were due to wage hikes, 140 bps came in from acquisition of LCC and Sofgen (both are relatively lower margin businesses), forex hit was 90 bps and part of this also came from higher SG&A, which the management said will remain high. Operating margin for the quarter dropped to 12.37 per cent compared with 18.36 per cent in the same period last year.
While Tech Mahindra’s focus on inorganic strategy is among factors that have pulled down in margins for the quarter and the year, a higher exposure to Europe also meant a larger impact of cross currency movement. It has a forex loss of Rs 154 crore for the quarter compared to a loss of Rs 35.6 crore in the quarter ended December 31, 2014. “The quarter was impacted by cross-currency headwinds and salary increases. Tech Mahindra, unlike other IT firms, has a bigger exposure to Europe and Australia and both these currencies have been impacted by the US dollar movement. I believe it will take one or two quarters for us to stabilise and we are not discouraged by and feel that there is decent growth,” said Vineet Nayyar, executive vice-chairman, Tech Mahindra. Despite the hit, the management maintained that they will continue on its inorganic growth strategy in future.
Revenue for the quarter was up 20.9 per cent at Rs 6,116.8 crore from Rs 5,058.1 crore in the same quarter last year. On a sequential basis, the company’s top line grew about 6.4 per cent. However, organic revenue for the year de-grew by 1.2 per cent, raising questions on whether the company’s stock would get higher valuation multiple. The revenue was slightly lower than Bloomberg consensus estimate of Rs 6,143 crore.
“Revenue has been in line, it is the margins that are disappointing. The company had indicated that acquisitions will impact its margins. Compared to the top players, Tech Mahindra has not done well. Moreover, comparing Tech Mahindra to others is not possible as it has been focused on inorganic growth,” said Sarabjit Kour Nangra, VP Research - IT, Angel Broking.
During the quarter, the company added 93 clients, of this 87 came from acquisition of LCC and SOFGEN. Both these acquisitions contributed $100 million during the quarter. C P Gurnani, CEO, Tech Mahindra, was positive on future growth. “For me and the top management, we have top three priorities. First is to consolidate. Focus on working on operating lever such as improving utilisation, relooking at onsite-offsite levers among others. Two, to focus on R&D and growth factories, and third, give high priority to improve margins,” said Gurnani during the analyst call.
For the full year, Tech Mahindra’s active clients were at 767 and it added 93 clients during the fourth quarter. “Our large deal pipelines look good and we will continue to invest in new technology areas. We will also focus on improving our Ebitda,” he added.
For the full year, Tech Mahindra’s net profit was down 13.2 per cent at Rs 2,627.67 crore from Rs 3,028.8 crore last year. Total income at Rs 22,727.75 crore was up 20 per cent.
Total headcount, as of March 31, 2015, was at 103,281, adding 13,840 professionals during the year and about 5,000 during the quarter. Software headcount stood at 72,952, Business Processing Outsourcing (BPO) at 22,693 and support at 7,636. Attrition continued to be at around 19 per cent with utilisation (excluding trainees) at 74 per cent. Tech Mahindra's stock was down by 1.2 per cent or Rs 7.65 ahead of the earnings (which came post market hours) and closed at Rs 640.55 on Tuesday. Given the disappointing results, expect the stock to react in opening trades on Wednesday.
