The Tech Mahindra stock continues to disappoint at the bourses. This is despite better than expected fourth quarter numbers and increasing revenues from customers other than BT (former British Telecom, its dominant client), which crossed the $500-million (Rs 2,250 crore) mark for the first time since the company's inception.
In the past six months, when the Bombay Stock Exchange’s information technology index gained five per cent, both Tech Mahindra (TechM) and Mahindra Satyam were underperformers, slipping by 20 per cent and 32 per cent, respectively. Last April, TechM had acquired a controlling stake in Satyam Computer Services, now rebranded as Mahindra Satyam.
A prime reason for stocks to plummet, say analysts, is that the manner in which the company treated the £126 million (Rs 850 crore) one-time restructuring fee BT gave it in the third quarter of 2009-10 in its books. TechM has said it would spread the restructuring fee over 19-20 quarters, effective from the first quarter (April-June) of 2010. It has included Rs 150 crore in the first three quarters of 2009-10. From the fourth quarter of FY10, over the next 19 quarters, it will add Rs 50 crore per quarter. Besides, the company maintained it now had a committed revenue of $70-72 million per quarter.
Analysts feel this violates the spirit of accounting policy. When TechM in FY2007 and FY2008 made two advance payments of a similar amount to BT, they were not amortised over a period of time but were shown as up-front payments. Why not follow the same logic now, they ask.
“Writing off a one-time payment to BT at one go by Tech Mahindra in Q4FY07 and Q4FY08 (despite payment relating to the contract won, to be executed over five years) and amortising (the present) restructuring fee over 19-20 quarters (starting Q1FY10) test the matching principle of revenue and related expenses each year,” say Sandeep Shah, Kripal Maniar and Varun Sharma of ICICI Securities in their report.
Anxieties on BT, others
The other reason for the stocks to take a beating is that market experts tracking the firm believe there is no further head room for growth in the BT account. This has anyway come at a price cut of 12-15 per cent post the restructuring, say sources within the industry. "We remain the largest vendor for BT and continue to be their partner in all their initiatives going forward. We will not be able to comment further on client-specific initiatives," said the company in an email response.
TechM asserts that for the first time since its inception, the non-BT revenue crossed the $500-million mark. But, the contention does not cut much ice with analysts. “While TechM received a Rs 970-crore refund from BT, as contracts could not be ramped up, growth in this client account is still not in sight. Moreover, the impact of reduced scope in these is unlikely to come over the next few quarters, but will likely be a persistent overhang on growth,” says Sandeep Muthangi of IIFL.
Analysts also feel that with a larger share of BT business and pressure in the telecom sector, it will only aggravate problems for the company. TechM doesn’t think so. “The telecom market is under huge pressure. In the developed market, the falling average revenue per user is a matter of increasing concern and operators are trying to reduce the spending through IT off-shoring and transformation initiatives. But, with in-depth understanding of end-to-end telecom business, we see large transformation opportunities in various segments of the telecom sector,” says TechM, when commenting on the business growth and pressure in the telecom sector.
This is reflected in the capex of the top five clients of TechM, expected to be muted. “The company has been successful in getting other major telecom players, apart from BT and AT&T, as its clients. But, the maximum capex growth within this client base happened in the period from CY04-08, with capex unlikely to accelerate post-2009,” states an ICICI Securities report.
“European and American telecom players have not shown signs of life. The consensus services revenue growth and Ebitda (operating margins) growth is tepid for both wireline and wireless players in US and Europe,” concurs an Elara Capital report.
Adding to the company’s problems is currency volatility, especially the euro and pound, and no clarity on Mahindra Satyam’s accounts or performance. These uncertainties are impacting the firm's valuations as well. According to a Citigroup Global Markets report: “On account of continuing challenges and cross-currency movement, the value of core business is at 8x September 11E. This is around 15 per cent discount to HCL Tech.”
(Additional reporting by Sarath Chelluri)
