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Tech Mahindra: Completes a landmark year
May 22, 2014

Tech Mahindra has announced its fourth quarter and full year results for the financial year 2013-2014. The company reported a 3.3% QoQ (quarter on quarter) growth in consolidated sales and a 32.4% QoQ fall in net profits. Here is our analysis of the results. The financials include the combined data of erstwhile Tech Mahindra and Mahindra Satyam.

Performance summary
  • Consolidated net sales grew by 3.3% QoQ. In US dollar terms, growth in revenues was 4.3% QoQ.
  • The EBITDA (Earnings before interest, tax, depreciation and amortization) margin decreased by 2% QoQ to 21.2% at the end of 4QFY14. A significant 7.3% QoQ increase in employee expenses impacted the operational performance. On an absolute basis, EBITDA fell 5.7% QoQ.
  • The company's net profit fell by 32.4% QoQ. However the bottom line numbers are strictly not comparable on a sequential basis. In 3QFY14 the company benefited from a huge write back of provisions relating to pending legal cases involving the erstwhile Satyam. This was to the tune of Rs 3,466 m including the tax write-back.
  • The company's employee base stood at 87,441 at the end of March 2014, recording a growth of 2.3% QoQ.
  • The total number of active clients increased from 605 at the end of 3QFY14 to 629 at the end of 4QFY14.

Consolidated Financial Snapshot
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Sales 48,986 50,581 3.3% 68,731 188,314 174.0%
Expenditure 37,623 39,863 6.0% 54,488 146,476 168.8%
Operating profit (EBITDA) 11,363 10,719 -5.7% 14,242 41,837 193.8%
Operating Profit Margin (%) 23.2% 21.2%   20.7% 22.2%  
Other income (457) (866)   (747) 1,130  
Interest 236 98 -58.4% 1,030 799 -22.5%
Depreciation 1,396 1,429 2.4% 2,000 5,222 161.1%
Exceptional items 1,200 -   - 1,200  
Profit before tax 10,474 8,325 -20.5% 10,465 38,147 264.5%
Tax 265 1,409   2,355 7,523 219.4%
Minority interest 111 91 -17.8% 196 336 71.1%
Profit from assosiates - -   4,964 -  
Profit after tax/(loss) 10,098 6,825 -32.4% 12,878 30,288 135.2%
Net profit margin (%) 20.6% 13.5%   18.7% 16.1%  
No of shares (m)         233.5  
Diluted earnings per shares         129.7  
P/E ratio#         13.5  
# On a trailing 12-months earnings basis

What has driven performance in 4QFY14?
  • Tech Mahindra recorded a 3.3% QoQ growth in its net consolidated sales during the quarter. The growth in the quarter was led by the core telecom vertical which grew by 7.7% QoQ. This represents the unmerged telecom business of the company. Manufacturing as well as retail were a drag on performance in the quarter.

  • In terms of geographies, revenues from the US were under pressure in the quarter. However this was compensated by the growth in revenues from Europe and the rest of the world.

    Revenue breakup
    (Rs m) 3QFY14 4QFY14 Change
    On the basis of industry
    Telecom 23,023 24,785 7.7%
    Manufacturing 9,307 9,105 -2.2%
    Tech, Media and Entertainment 5,388 5,564 3.3%
    Banking, Financial Services and Insurance 4,899 5,058 3.3%
    Retail, transport and logistics 3,429 3,035 -11.5%
    Others 2,939 3,035 3.3%
    On the basis of geography
    US 23,023 22,761 -1.1%
    Europe 15,185 15,680 3.3%
    Rest of the world 10,777 12,139 12.6%

  • Tech Mahindra's operating margin declined by 2% QoQ to 21.2% at the end of 4QFY14. This could be attributed to a significant sequential rise in employee costs by 7.3%. On an absolute basis the operating profits decreased by 5.7% QoQ.

  • The company's net profit fell 32.4% QoQ. However too much should not be read into this. In 3QFY14, the company settled several key cases against erstwhile Satyam in US courts. This had enabled Tech Mahindra to write back Rs 1,200 m in provisions as well as Rs 2,266 m in taxes related to that provisioning. Thus in 3QFY14 the company's net profit had risen by 40.6% QoQ. Without that benefit in this quarter, the company's bottomline has seen a fall sequentially.
What to expect?
At the current price of Rs 1,750 Tech Mahindra's stock is trading at a multiple of 13.5 times its trailing twelve months earnings.

The company has seen good revenue growth in the recent past. This is the third straight quarter in which US dollar revenue growth has exceeded 4% on a sequential basis. The company's strong deal pipeline has certainly helped it deliver on the topline. However the management stated that the pick-up in discretionary IT spending was rather slow and uneven across different geographies.

Tech Mahindra has seen a good pick-up in its traditionally strong Telecom vertical. The company is also making good inroads into the enterprise services space. The recent acquisition of Mahindra Engineering services will also help to strengthen its domain expertise in the Manufacturing vertical. However the company still has a long way to go before it can catch up with the top Indian IT companies.

The management clarified that the fall in operating margin was largely due to the wage hikes given to employees in the quarter as well as the contract restructuring currently underway with its erstwhile largest client, British Telecom. The management has not ruled out a pick-up in margins going forward.

It has been a landmark year for the company as it completed one of the largest acquisitions in Indian corporate history. The management has stated that most of the litigations surrounding the erstwhile Satyam have been completed and only a few cases remain mostly in India.

The fundamentals of Tech Mahindra remain strong. However considering the risk profile of the company, the aggressive inorganic growth path that the management intends to follow as well as the valuations we believe that most of the upside is priced in at current levels. Therefore we continue to maintain our 'Sell' view on the stock.

We would also like to suggest our subscribers to ensure that their allocation to equities is decided after keeping some cash aside. Further, they should also ensure that within their overall exposure to equities, no single share should comprise more than 5% of their equity portfolio.

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