Tech Mahindra: Billion dollar baby

The $1 billion order from British Telecom will give the company's revenues a boost.

With a $1-billion deal from stakeholder British Telecom(BT) under its belt, the Rs 1242 crore Tech Mahindra (TM) is all set to go places. The Pune-based technology player should see revenues crossing the Rs 4,600 crore or the $1 billion mark by FY09. While it would still be way behind the top tier players, TM, which focuses on the telecom vertical, should nonetheless be able to scale up its business. Says Priya Rohira, who tracks information technology at Enam Securities, "The deal is important because it could help the company get more orders from other international telecom majors, helping it to grow faster."

For the first time, TM will be working with BT Global services, rather than BT itself. It will service clients like Shell and support the managed services for customers, provide ongoing services for their internal systems, processes and re-usable platforms. Says Vineet Nayyar, vice-chairman and MD, " We will be stepping out from within the confines of BT to BT Global's clients, although we will be doing this work along with them." BT, which holds a 36 per cent stake in TM, already contributes around 58-62 per cent to the latter's revenues: in the September 2006 quarter, revenues from BT accounted for 64 per cent.

In fact, over the past five years revenues from BT have doubled. With the new order, BT's share would go up but industry watchers are not too concerned. Says Siddharth Pai, partner and managing director, TPI Advisory Services, "I wouldn't worry about the company having too much exposure to the telecom vertical." Also, operating margins could be under pressure for the first year of the contract till the volumes pick up. Says Enam's Rohira, "TM's operating profit margin in the September quarter was around 24 per cent.This could dip slightly due to initial expenses, especially more people. However, margins should stabilise in due course." Nayyar confirms this. "Front-ended costs could dilute margins initially,"he says.

While the deal should fetch TM annual revenues of $200 million over the next five years, it can also be leveraged by the company for additional wins. However, it will not be easy for TM to bag orders from the likes of Vodafone or Verizon. Says an industry insider, "After all, the order has come from a promoter, so breaking into the big telcos will not be that simple." Again, while BT may have signed on TM for a $ one billion order, both parties will have to deliver on their commitments.

What TM has going for it is that offshoring of technology services by telecom companies is increasing. Revenues for IT vendors catering for the telecom vertical have been growing at 40-50 per cent in the last couple of years as telcos have attempted to free up maintenance budgets in a more deregulated environment. Telcos have also helped clients transform their networks so as to offer converged data, voice and video services on a single network. As Pai points out, "TM is well poised to cash in on the telecom vertical even in the booming domestic market." The growth potential from AT&T, an existing client, has also grown post the merger with SBC, Bell South and Cingular Wireless.

TM has also been looking to foray into newer areas like Internet Protocol Television (IPTV). The company plans to work with broadband providers to offer IPTV solutions and will also take up network design for clients, given the success of IPTV solutions provided by it to two broadcasters in UK and US. To fuel its growth, TM plans to spend around Rs 700 crore over the next three years. A sound investment, you could say.