Tech Mahindra Q1 preview: Weak numbers likely; revenue guidance eyed

Tech Mahindra, the Pune-headquartered IT services firm, is likely to report a weak set of numbers for June quarter of the financial year 2019-20 (1QFY20) when it declares its financial results Tuesday. In line with industry peers, the company is expected to see a dip in operating margin, owing to rupee appreciation, wage hikes, visa fees and Comviva seasonality.

Revenue is also expected to decline sequentially, with cross currency headwinds of up to 80 basis points (bps). Weakness in the banking, financial services and insurance (BFSI) and manufacturing segments will contribute to weak numbers, while healthcare segment will recover marginally, analysts say.

"We build in 0.5 per cent quarter-on-quarter (QoQ) constant currency (CC) revenue growth with nearly 80 bps impact from currency headwinds. We expect EBIT (earnings before interest and tax) margins to decline by 130 bps QoQ, negated somewhat by the absence of one-off costs incurred in Q4. Profit is expected to decline by nearly 11 per cent QoQ on account of a decline in margins, lower other income and higher taxes (expect a tax rate of 25 per cent in June'19 quarter against 23.9 per cent in Mar'19 quarter)," wrote analysts at Emkay Global in a results preview note.

In the year-ago period, Tech Mahindra had reported 12.4 per cent year-on-year (YoY) rise in consolidated net profit at Rs 897.9 crore while the consolidated revenue stood at Rs 8,276.3 crore, up 12.8 per cent YoY. In dollar terms, Tech Mahindra’s profit grew 6.5 per cent to $131.8 million, while revenue was up 7.5 per cent YoY to $1.22 billion.

As per Nirmal Bang Securities, the company is likely to post a revenue of Rs 8,874.4 crore, up 7.2 per cent YoY. Sequentially, the numbers are expected to drop 0.2 per cent. It has factored in 1 per cent QoQ CC (constant currency) revenue growth and around 40bps cross-currency headwind leading to a growth of 0.6 per cent in US dollar terms. It sees EBIT to come in at Rs 1,149.7 crore, up 6.8 per cent YoY (down 16 per cent QoQ).

At the bourses, shares of Tech Mahindra have under-performed the market by falling 9 per cent during April-June 2019 quarter. In comparison, the benchmark S&P BSE Sensex has gained nearly 2 per cent, while the S&P Bse IT index has risen around 2.50 per cent, ACE Equity data show.

"Tech Mahindra will disappoint with revenue decline of 85 bps and cross-currency headwind of 65 bps. Revenue growth has slowed down to a trickle on yoy comparison. We expect sequential EBIT margin decline of 250 bps contributed by 100 bps impact from wage revision, higher visa applications, Rupee appreciation and seasonal impact of lower Comviva revenues," says a note from Kotak Securities. The brokerage also expects the company's 6-8 per cent revenue growth expectation for FY20 could move to the lower end of the band.

Key things to watch out for in the commentary include timeline for 5G deal flow and impact of US ban on Huawei on 5G adoption, health of enterprise business especially in the manufacturing vertical where the company has high exposure to the auto sector, reasons for slowdown in revenue growth in the enterprise segment, and M&A strategy and capital allocation.

So far in the Tier-1 IT space, Infosys and Tata Consultancy Services (TCS) have delivered a good performance for the April-June quarter, while Wipro disappointed the street with weak numbers and muted revenue guidance for FY20.