Investors punish Tech Mahindra stock on weak performance

Firm's Q4 profit dipped 31% to Rs 588 cr due to project cancellations in communication business

Tech Mahindra saw its stock trade the lowest in nine years on Monday after a disappointing fourth quarter, by reporting operating margins at 12 per cent, the lowest among the top-five Indian software exporters.

After falling to Rs 356.65, when it acquired Satyam, the stock closed at Rs 379.30 on the Bombay Stock Exchange, down 11.6 per cent as investors sold the company shares on the back of its poor performance.

Tech Mahindra saw fourth quarter profits dip by 31 per cent to Rs 588 crore as it saw project cancellations in its communication business amidst restructuring of Lightbridge Communications Corporation (LCC), a US firm it acquired in 2015. Its margin at 12 per cent was the weakest among the top five Indian IT services firms.

Tech Mahindra saw revenues grow 8.9 per cent to Rs 7,495 crore in the January to March quarter.

"The margin performance has been quite bad and hence the confidence levels are low. We can see a 10 per cent cut on FY19 expected earnings," said Madhu Babu, analyst at Prabhudas Lilladher Pvt Ltd., a brokerage. The firm has cut EPS estimates by eight to ten per cent.

The first quarter is expected to remain soft for Tech Mahindra. However, medium term recovery is expected as the company is working towards cost cutting initiatives, he said in a note.

Tech Mahindra has faced the biggest brunt of the changing shifts in the technology services industry. Customers are shifting investments from legacy software to newer areas such as digital and cloud, while automation is taking over low-end jobs such as testing and maintenance. In addition, there is growing protectionism in its main markets such as the US. The company is struggling to navigate this shift.

The firm , however, hopeful of improvements in profitability from the first quarter of this fiscal once the LCC business settles down.

Chief executive C P Gurnani said that the IT services industry has been seeing a disruption amidst "changing demand pattern from the clients, technological changes and requirement for significant skill enhancement" and the company responded to them "quite proactively by reimagining the business, imbibing a culture of innovation and encouraging reskilling".

But not all are convinced.

Kuldeep Koul and Bhrugesh Parsawala from ICICI Securities had noted earlier that it would take the company a few quarters to stabilize the concessions doled out to some of their large clients. The EBITDA margins at 12 per cent have been the lowest since the drop observed during their merger with Satyam. "The decline in prices today was expected and it will not affect our estimates as we see the margins recovering in coming quarters so we will stick to our earlier estimates for the company, " said Parsawala.