 "Tech Mahindra: Beats estimates but worries remain")
The Tech Mahindra stock has fallen about 14 per cent in the past one year. Continued weakness in its organic business for two quarters in a row is a key reason for this under-performance. While the September quarter numbers, especially margins and profits, were visibly ahead of expectations, a significant reversal in the company’s fortunes may not happen soon.
The US has been a key driver of growth in the quarter. While the telecom and communications business (53 per cent of consolidated revenues) grew three per cent sequentially after a couple of quarters of decline, sustainability of the same remains key. Some of the other metric also remain weak. For instance, revenue from the top five clients has fallen every quarter since September 2014 from 51 per cent to about 43 per cent. The company also witnessed a 100 basis points sequential fall in top five, 10 and 20 clients in the September quarter indicating that a relatively larger chunk of new client additions have been in lower revenue brackets.
Overall, revenues grew 5.1 per cent sequentially to Rs 6,616 crore and were a tad above Bloomberg consensus estimate of Rs 6,586 crore. Dollar revenues, which have been fairly volatile over the past few quarters, grew 2.2 per cent sequentially to $1,011 million.
The management’s cautious optimism for the rest of the year though provides hope. But, investors should note that the December quarter is a seasonally weak quarter for the sector on the back of higher furloughs and thus lower number of working days. Both these factors together indicate that a significant improvement in the second half performance versus the first half seems unlikely.
Positively, the company’s net profit for the September quarter grew by a robust 16.2 per cent sequentially to Rs 786 crore and was ahead of Bloomberg consensus estimate of Rs 727 crore. Even after excluding the one-off item viz write-back of Rs 32 crore due to excess provisions made towards the erstwhile Satyam, net profit was ahead of estimates aided by strong gains in EBIT (earnings before interest and tax) margin.
The latter grew 141 basis points sequentially to 13.7 per cent due to strong surge in utilisation rates.
