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Tech Mahindra: A bad end to FY15 - Views on News from Equitymaster
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Tech Mahindra: A bad end to FY15
Jun 4, 2015

Tech Mahindra has announced its fourth quarter results and full year results for 2014-2015. The company reported a 6.3% QoQ growth in consolidated sales and a 41.4% QoQ fall in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 6.3%% QoQ. In US dollar terms, growth in revenues was 2.7% QoQ.
  • Operating expenses increased by 13% QoQ, far higher than the growth in sales. Thus, the EBITDA (Earnings before interest, tax, depreciation and amortization) decreased by a steep 20% QoQ. The EBITDA margin fell to 15.2% compared to 20.2% at the end of 3QFY15.
  • Due to the poor operating performance and a huge forex loss of about Rs 1,541 m the company's net profit fell by 41.4% QoQ.
  • The company has completed a bonus issue of 1:1 per share.
  • The company's stock has also been split from Rs 10 to Rs 5 per share.
  • The company has declared a final dividend of Rs 6 per share (on the new face value of Rs 5).

Consolidated financial snapshot
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 57,517 61,168 6.3% 188,314 226,213 20.1%
Expenditure 45,916 51,882 13.0% 146,476 184,684 26.1%
Operating profit (EBITDA) 11,601 9,286 -20.0% 41,837 41,529 -0.7%
Operating profit margin (%) 20.2% 15.2%   22.2% 18.4%  
Other income 190 (653)   1,130 1,065 -5.8%
Interest 39 177 354.1% 799 298 -62.6%
Depreciation 1,441 1,722 19.5% 5,222 6,114 17.1%
Exceptional items - -   1,200 -  
Profit before tax 10,311 6,734 -34.7% 38,147 36,181 -5.2%
Tax 2,512 1,845 -26.6% 7,523 9,596 27.5%
Minority interest 31 170 442.4% 336 310 -7.6%
Profit from assosiates 285 1   - 1  
Profit after tax/(loss) 8,053 4,720 -41.4% 30,288 26,277 -13.2%
Net profit margin (%) 14.0% 7.7%   16.1% 11.6%  
No of shares (m)         960.8  
Diluted earnings per share         27.3  
P/E ratio#         20.3  
# On a trailing 12-months earnings basis

What has driven performance in 4QFY15?
  • In terms of verticals as well as geographies; the growth was poor in a fairly broad based manner.

    Revenue breakup
    (Rs m) 3QFY15 4QFY15 Change
    On the basis of industry
    Communications 29,276 33,826 15.5%
    Manufacturing 11,331 10,093 -10.9%
    Tech, Media and Entertainment 4,199 4,282 2.0%
    Banking, Financial Services and Insurance 5,637 5,566 -1.2%
    Retail, Transport and Logistics 3,681 3,792 3.0%
    Others 3,451 3,670 6.3%
    On the basis of geography
    Americas 28,068 27,770 -1.1%
    Europe 18,060 18,228 0.9%
    Rest of the world 11,388 15,170 33.2%

  • In terms of operating performance, wage hikes, costs related to integration of acquisitions as well as cross currency headwinds were the main culprits which resulted in the significant fall operating margins in 4QFY15. However, we believe more margin pressures could be in store for the company.

  • The poor operating performance as well as the forex loss led to the steep fall in the bottomline. The net profit was down by 41.4% QoQ. The net margin fell to 7.7% compared to 14% at the end of 3QFY15.
What to expect?
At the price of 555 the stock of Tech Mahindra trades at 20.3 times its trailing twelve months earnings.

Tech Mahindra had a good year in terms of topline growth. The total number of active clients at the end of the tear stood at 767 compared to 629 at the end of FY14. Even in 4QFY15 the company won US$ 125 m worth of deals. The pipeline remains healthy.

Margin pressure will continue to remain the main problem for the company. The company's ambitious growth plans driven by multiple acquisitions have resulted in a considerable increase in integration costs. The employee costs in FY15 increased by 29.6% YoY largely due to increase in the number of onsite employees (due to the acquisitions) as well as wage hike to keep attrition in check. Despite the wage hikes however, attrition has increased to 19% at the end of FY15 compared to 15% at the end of FY14.

In 4QFY15 there was a marginal sequential decline in organic constant currency revenues due to client specific issues. These issues facing the company are not as much of a concern to us as the poor prospects for margins going forward.

The long term fundamentals of Tech Mahindra are sound. However, considering the risk profile of the company, the aggressive inorganic growth path that the management is following as well as the expensive valuations of the stock; we believe that there is no margin of safety for investors at current levels. Therefore, we maintain that investors should not buy the stock at these levels.

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