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Tech Mahindra: One-off items impact bottomline - Views on News from Equitymaster

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Tech Mahindra: One-off items impact bottomline
May 20, 2008

Performance summary
  • Topline grows by 5% QoQ in 4QFY08 and 29% YoY in FY08. Growth aided by the TSP (telecom service providers) and BPO segments. Actual sales figure 8% lower than our estimates.

  • Operating margins contract by 3.3% YoY in FY08 due to impact of rupee’s appreciation against the US dollar and capacity buildup to cater to large size deals.

  • Bottomline expands by 277% YoY during FY08, largely due to higher other income and lower extraordinary expenses. Excluding the impact of extraordinary items (upfront payments for taking over large size deals) from both the fiscals’ performance, net profits have grown by 26% YoY during FY08 (4% lower than our estimates). For 4QFY08, the company has recorded a loss, again on account of this one-off expense.

  • Board recommends dividend of Rs 5.5 per share (dividend yield 0.6%).


Consolidated Financial Snapshot
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 9,704 10,218 5.3% 29,290 37,661 28.6%
Expenditure 7,575 7,994 5.5% 21,908 29,404 34.2%
Operating profit (EBITDA) 2,129 2,224 4.5% 7,382 8,257 11.9%
Operating Profit Margin (%) 21.9% 21.8%   25.2% 21.9%  
Other income 300 364 21.3% 60 1,044 1640.0%
Interest 16 5 -68.8% 61 62 1.6%
Depreciation 206 229 11.2% 515 796 54.6%
Profit before tax 2,207 2,354 6.7% 6,866 8,443 23.0%
Tax 213 165 -22.5% 740 747 0.9%
Minority interest 1 (1)   (1) 5  
Extraordinary Items   (4,401)   (5,249) (4,401) -16.2%
Profit after tax (loss) 1,995 (2,213)   876 3,300 276.7%
Net profit margin(%) 20.6% -21.7%   3.0% 8.8%  
No of shares (m)       121.2 121.4  
Diluted earnings per shares       7.2 27.2  
P/E ratio         33.5  

What has driven performance in FY08?
  • Tech Mahindra recorded a 29% YoY growth in topline during FY08. This was driven by growth in the TSP as well as rapid growth in the BPO segment, which grew by more than 800% YoY in sales. The TSP segment’s revenue grew by 26% YoY during the fiscal (the segment contributes 91% to total revenues). The company derived 19%, 74% and 7% of its revenues in FY08 from the US, Europe and ROW (rest of the world) regions respectively. It added 3,135 employees during the fiscal, thus taking the total headcount to nearly 23,000 by the end of March 2008.

    Segment-wise Detail
    Revenues (Rs m) FY07 % Share FY08 % Share  
    Telecom service provider (TSP) 26183 94.9% 32892 91.2% 26%
    Telecom equipment manufacturer (TEM) 600 2.2% 1060 2.9% 77%
    BPO service 141 0.5% 1297 3.6% 820%
    Others 653 2.4% 798 2.2% 22%
    Total 27577   36047   31%
    PBIT          
    Telecom service provider (TSP) 10386 97.4% 11973 92.6% 15%
    Telecom equipment manufacturer (TEM) 117 1.1% 230 1.8% 97%
    BPO service -15   490 3.8% -3367%
    Others 170 1.6% 242 1.9% 42%
    Total 10658   12935    

  • Tech Mahindra’s operating margins contracted by 3.3% during FY08, largely on account of rupee’s 11% YoY appreciation against the US dollar, transition cost incurred to meet needs of long term contract and higher sales and administrative expense (as percentage of sales). This decline has prompted management to increase utilisation and hold on to the employee addition and retention in the near term. The company however managed to bring down attrition rate in 4QFY08, from 20% in the third quarter. Utilisation levels have also increased from 69% in 3QFY08 to 73% in 4QFY08, thus helping it to pass some pressure from the operating profitability.

  • Tech Mahindra’s net profits grew by 277% YoY during FY08 mainly due to a sixteen fold jump in other income and lower extraordinary expenses. Excluding the impact of extraordinary items (upfront payments for taking over large size deals – fully booked during the fourth quarter) from both the fiscals’ performance, net profits have grown by 26% YoY during FY08. For 4QFY08, the company has recorded a loss, again on account of this one-off expense. Excluding this, net profits have grown by 10% QoQ during the quarter.

What to expect?
At the current price of Rs 911, the stock is trading at a multiple of 9.6 times our estimated FY10 earnings. Tech Mahindra has performed fairly in line with our estimates, excluding the impact of one-off items on its books. The management has indicated that company is particularly targeting new markets like Canada and Africa to grow its business going forward. While a slowdown in the US and unpredictable rupee movement against the US dollar might affect the company’s performance going forward, we can take comfort from the fact that it drives around 74% of its revenue from the European region and relatively much smaller portion from the US (unlike its peers who derive a majority of their sales from the US). However, investors need to take into account the fact that the company is exposed to risk of single client (BT) dependency. While Tech Mahindra has not disclosed much about the new deal (for which it has made an upfront payment of Rs 4.4 bn) due to of regulatory issues, we can assume this is going to be one of major deals in the company’s kitty and can help it in driving higher its revenues going forward.

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