Tech Mahindra: Silver lining

Lower dependence on the US will protect the company from a rising rupee.

Tech Mahindra's top line grew at 13.6 per cent q-o-q, ahead of analysts' expectations of around 10-11 per cent. The growth was driven mainly by its key customer British Telecom, which posted a 17 per cent q-o-q growth in revenues.

However, at the operating level, the growth was not as good-operating profit improved 7 per cent, while operating profit margin declined 156 basis points to 26.9 per cent.

The silver lining to Tech Mahindra is its lower dependence on the US, which would protect it from the depreciating dollar better than other software players: the US accounted for about 19 per cent of its revenues. The contribution from Europe went up by 300 basis points sequentially to 76 per cent in Q4 FY07.

During Q4, Tech Mahindra incurred a one-time exceptional charge towards an upfront payment to British Telecom Global Services, which resulted in the company posting a loss at the net level.

The company had a debt of $90 million at the end of the December 2006 quarter towards payment of this one-time fee, which reduced to $4 million in Q4 FY07. Without this exceptional item, its net profit in Q4 was up 17.6 per cent q-o-q, which is impressive. With the $1-billion deal from BT over the next five years, there is little to worry about Tech Mahindra's growth going forward.

Tech Mahindra will start the project this month, and revenues are expected to be substantial from Q3 FY08. Operating margin is expected to remain under pressure as selling, general and administrative expenses are likely to remain at the 15 per cent level.

However, it could improve the onsite-offshore mix. Also, utilisation rates, which have declined from 74 per cent to 67 per cent between Q1 FY07 and Q4 FY07, will go up once the BT project takes off. Also, it is hiring more freshers, which should help in better margins. The Tech Mahindra stock declined 4 per cent after the results, and trades at a reasonable 22 times estimated FY08 earnings.

Bharati Shipyard: In calm waters

Bharati Shipyard has once again leveraged the current upturn in the global offshore oil exploration business, via strong demand for its offshore vessels and anchor handling tugs in the March 2007 quarter. But rising input costs such as metals, coupled with higher staff costs put pressure on its operating margins in the last quarter.

As a result, operating profit grew 23.8 per cent y-o-y to Rs 52.4 crore in Q4 FY07 compared with 75.6 per cent growth in total income (including subsidy received) to Rs 158.35 crore. Operating profit margin also declined 1350 basis points y-o-y to 33.1 per cent in the last quarter.

Consumption of materials and stores as a percentage of total income went up 610 basis points y-o-y to 44.9 per cent in the last quarter. Meanwhile, growth in the last quarter was aided by its enhanced capacity at Ratnagiri and Goa shipyards, say analysts.

In contrast, in FY07, operating profit grew 40 margin basis points y-o-y to 30.3 per cent. Prominent orders bagged by the company in the previous year include an order worth Rs 120 crore from Reliance Industries for construction of six vessels.

Going forward, Bharati's growth would be powered by its unexecuted order book of Rs 2394.24 crore at the end of FY07, a growth of 117.5 per cent y-o-y. However, the ability to manage rising metal costs would also be crucial. The stock trades at 9 times estimated FY08 earnings, which is not expensive.