 "An employee sits at the front desk inside Tech Mahindra office building in Noida on the outskirts of New Delhi")
The third quarter results of Tech Mahindra, India’s fifth largest information technology services player, were a shade lower than Street estimates. However, slower revenue growth in major markets such as Europe and the US, and lower other income dented its net profit numbers.
What might disappoint the Street and also pull down the stock on Tuesday is its dollar revenue growth, which grew a marginal 0.4 per cent and the firm’s weak margin improvement. The company announced margins of 14.3 per cent. Focus on merger and acquisitions have impacted Tech Mahindra’s margin growth.
Tech Mahindra announced consolidated net profit of Rs 759 crore for the third quarter ended December 31, 2015 - down 5.7 per cent from Rs 805.3 crore in the same quarter last financial year. On a sequential basis, profits were down 3.3 per cent.
Revenue for the third quarter at Rs 6701 crore was up 16.52 per cent and grew 1.3 per cent sequentially. Constant currency revenue growth was 1.2 per cent sequentially in line with players such as Infosys (1.1 per cent) and Wipro (1.4 per cent).
Bloomberg consensus estimates for revenue was Rs 6,749 crore while that for net profit was Rs 772.7 crore. Growth for the quarter was led by rest of the world segment, which grew 6.7 per cent quarter on quarter, whereas major markets Europe and the US remained more or less flat.
The company acknowledged that Chennai floods impacted the company’s performance due to lost man-days.
“Our deal pipeline remains stable. In the past three quarters, we have announced annualised deals of $1 billion. We end this quarter with 801 customers, which has gone up by 13 new customers,” said C P Gurnani, CEO of Tech Mahindra.
In terms of verticals, pressure in the telecom sector continues to prevail with large clients holding on to budgets due to the ongoing mergers and acquisitions. Tech Mahindra’s management said no timeline could be given on the improvement of the sector. Manoj Bhat, deputy chief financial officer said during an analysts’ call that the next two quarters’ communication and oil & gas would be volatile. “The worst side of decline is over, but if you ask me about visibility it’s still not clear as clients’ decision making is slow.”
What also looks as pressure for the company is the decline in revenues from the top one, 10 and 20 client segment. The management said clients’ performance was impacted due to cross-currency movement, seasonal impact due to furloughs in communication and TME (telecom, media and entertainment) sectors. They also acknowledged there were project cut downs and slowdown across clients. “We think this is just a cycle and we anticipate that as we go forward and our customer transform, we will have to grow with them,” said Bhat.
In terms of geography growth, rest of world grew 6.7 per cent but Americas fell 1.7 per cent and Europe was flat.
“The challenge facing the industry now is to understand the full potential of digital technology and help customers make the best of it at the earliest. We believe we are well-positioned to serve those interests,” said Gurnani.
We continue to drive growth in a seasonally weak quarter, through offerings that are echoing well with the market, which holds the potential to deliver long-term opportunities. We are enabling digital transformations for customers in the areas of Internet of Things, automation, machine learning, and artificial intelligence.
