Tech Mahindra beats the Street

There is scope for more improvement in profitability, given the gap between the company and the big 4

After its merger with Mahindra Satyam, Tech Mahindra has been one of the top performing information technology (IT) stocks on the bourses. In 12-months, the stock has moved up nearly 80 per cent, behind HCL Technologies but ahead of TCS, Infosys and Wipro. Investors have been betting on faster growth from the company, given the scale and geographical footprint it acquired from Mahindra Satyam. The company has not disappointed investors so far and the third quarter was not an exception.

The country’s fifth largest IT exporter reported profit at Rs 1,010 crore during the quarter, a jump of over three times from Rs 321.5 crore during the same quarter a year ago. This was higher than the Street expectation of Rs 662 crore. The profit was up 41 per cent on a sequential basis ahead of estimates, aided by exceptional gains, such as tax writeback, forex gains and writeback of past provisions. Excluding these, the company would have barely managed to meet the Street’s consensus estimates.

  The operational matrix was, however, ahead of analysts’ expectations with revenues (in dollar terms) up 4.4 per cent, quarter-on-quarter, against the Street expectations of 2.8 per cent growth. The company added 2,165 employees during the quarter, taking its headcount to a little over 87,000. In all, the company bagged 11 new contracts/businesses during the quarter, of which one is worth about $50 million. The firm has 605 active clients at the end of the third quarter, compared with 576 at the end of the second quarter.

In rupee terms, revenues were up 33 per cent, year-on-year, to Rs 4,898.5 crore, beating brokerages’ average expectations of Rs 4,825 crore. Revenues were up 2.7 per cent on a sequential basis. This makes Tech Mahindra the third best performer in the third quarter, behind HCL Tech and TCS but ahead of Infosys and Wipro. Faster revenue growth, coupled with a weaker rupee, helped Tech Mahindra improved its operating margin to 23.2 per cent, up 150 basis points on a year-on-year basis but marginally down sequentially.

There is scope for a further 200-300-basis point improvement in Tech Mahindra’s operating margins, given it still lags peers on this count. TCS and Infosys operating margins are in the range of 30 per cent, while HCL Tech and Wipro lag at 25-26 per cent. This, coupled with synergy gains from its merger with Mahindra Satyam, makes it a good buy for investors looking for options beyond the big four IT stocks — TCS, Infosys, Wipro and HCL Technologies.