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Tech Mahindra: BT uncertainty looms large - Views on News from Equitymaster
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Tech Mahindra: BT uncertainty looms large
Apr 28, 2009

Performance summary
  • Sales grow by 19% YoY during FY09, decline 7% QoQ during the quarter. Growth in sales during the fiscal largely on account of improved volumes, as billing rates come under severe pressure. Uncertainty over business from its largest customer BT (52% of total sales) looms large. As a matter of fact, revenues from BT decline by 15% QoQ during the fourth quarter.
  • Operating margins expand by 6.8% YoY during the fiscal, aided by a higher share of offshore business and increased utilisation.
  • Net profits (excluding an extraordinary expense incurred in FY08) grow by 32% YoY during FY09.


Consolidated Financial Snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 11,322 10,513 -7.1% 37,661 44,647 18.5%
Expenditure 8,143 7,671 -5.8% 29,404 31,822 8.2%
Operating profit (EBITDA) 3,179 2,842 -10.6% 8,257 12,825 55.3%
Operating Profit Margin (%) 28.1% 27.0%   21.9% 28.7%  
Other income (397) 78   1,044 (378)  
Interest - 23   62 25 -59.7%
Depreciation 286 286 0.1% 796 1,097 37.9%
Profit before tax 2,496 2,610 4.6% 8,443 11,325 34.1%
Tax 270 306 13.3% 748 1,179 57.6%
Extraordinary income/(expense) - -   (4,401) - -100.0%
Minority interest 3 1 -70.4% 5 (1) -120.0%
Profit after tax/(loss) 2,229 2,305 3.4% 3,299 10,145 207.5%
Net profit margin (%) 19.7% 21.9%   19.8% 19.8%  
No of shares (m)       121.4 121.8  
Diluted earnings per shares         83.3  
P/E ratio         3.8  

What has driven performance in FY09?
  • Tech Mahindra recorded a 7% QoQ decline in sales during 4QFY09. This was led by a 3% QoQ decline in volumes. Growth during the full year FY09 stood at 19% YoY. As for the segments, the TSP segment recorded a 15% YoY growth in sales during the year. The TEM segment registered an even healthier 24% YoY growth. Overall, growth in Tech Mahindra’s total sales during the fiscal was largely on account of volume growth as billing rates came under severe pressure. Uncertainty over business from its largest customer BT (52% of total sales) also loomed large on the company and the management has asked for around two quarters of time before it sees any signs of revival from this deal. As a matter of fact, revenues from BT decline by 15% QoQ during the fourth quarter.

    Segment-wise details
    Revenues (Rs m) FY08 % Share FY09 % Share Change
    Telecom service provider (TSP) 33,612 89.2% 38,750 86.8% 15.3%
    PBIT margin 38.1%   41.4%    
    Telecom equipment manufacturer (TEM) 1,937 5.1% 2,409 5.4% 24.4%
    PBIT margin 14.6%   27.0%    
    BPO service 1,296 3.4% 2,502 5.6% 93.1%
    PBIT margin 37.7%   51.2%    
    Others 816 2.2% 986 2.2% 20.9%
    PBIT margin 26.5%   29.5%    

  • Based on geographies, Tech Mahindra saw the maximum traction in revenues from North America, which grew by 56% YoY during FY09. Europe, the company’s biggest geography, recorded sales growth of just around 7% YoY. This could largely be attributed to the weak performance of its account with BT. For the fourth quarter, for instance, revenues from the European region declined by 11% QoQ.

  • Tech Mahindra’s operating margins expanded by 6.8% YoY during FY09, largely aided by a higher share of offshore business and increased utilisation.

  • Tech Mahindra’s net profits (excluding an extraordinary expense incurred in FY08) grew by 32% YoY during FY09.

What to expect?
At the current price of Rs 315, the stock is trading at a multiple of 3.8 times its trailing 12 months earnings. Tech Mahindra’s topline for FY09 has come in around 6% lower than our estimates while the bottomline has been 18% up as against our estimates. The management has indicated utmost caution with respect to the global technology offshoring environment. While keeping almost mum about the Satyam acquisition, the management has indicated that both the companies will continue to operate as independent units for the next two years, after which they will be merged to form a single company. As far as the business from BT is concerned, the management expects the situation to get cleared over the next two quarters.

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