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Tech Mahindra: Higher utilisation aids margins - Views on News from Equitymaster
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Tech Mahindra: Higher utilisation aids margins
Jul 25, 2008

Performance summary
  • Topline grows by 9% QoQ in 1QFY09 on account of growth across all business segments.
  • Operating margins expand by 3.9% QoQ during the quarter on the back of lower SG&A expenses (as percentage of sales), better utilisation and depreciation of rupee against the US dollar.

  • Bottomline grows by 18% QoQ during the quarter, excluding the impact of extraordinary item in previous quarter (upfront payment for getting a large deal from BT)

  • Number of customers increase to 110, from 107 at the end of 4QFY08.

  • Adds 1,485 employees during 1QFY09 taking total employee strength to 24,300 at the end of June 2008.

Consolidated Financial Snapshot
(Rs m) 4QFY08 1QFY09 Change
Sales 10,218 11,164 9.3%
Expenditure 7,994 8,296 3.8%
Operating profit (EBITDA) 2,224 2,868 29.0%
Operating Profit Margin (%) 21.8% 25.7%  
Other income 364 261 -28.3%
Interest 5 2 -64.0%
Depreciation 229 258 12.6%
Profit before tax 2,354 2,869 21.9%
Tax 165 282 71.0%
Minority interest (1) (2) 80.0%
Extraordinary Items (4,401) -  
Profit after tax/(loss) (2,213) 2,585  
Adjusted profit after tax/(loss)* 2188.0 2,585 18.2%
Net profit margin (%) 21.4% 23.2%  
No of shares (m)   121.5  
Diluted earnings per shares*#   70.6  
P/E ratio#   10.5  
* Excluding extraordinary items in 4QFY08 and FY08 # On a trailing 12-months earnings basis

What has driven performance in 1QFY09?
  • Tech Mahindra recorded a 9% QoQ growth in topline during 1QFY09. This growth was driven by all round performance from its Telecom service provider (TSP), Telecom equipment manufacturer (TEM) and BPO segments. TEM (4.6% of total revenue) contributed maximum to the growth as sales here grew by almost 110% QoQ. TSP segment’s revenues grew by 5% QoQ during the quarter. The BPO business (6% of total revenue) recorded a healthy 33% QoQ growth during the quarter.

    Segment-wise Detail

    Revenues (Rs m) 4QFY08 % Share 1QFY09 % Share Change
    Telecom service provider (TSP) 9,298 91.0% 9,787 87.7% 5.3%
    PBIT margin 34.1%   39.3%    
    Telecom equipment manufacturer (TEM) 245 2.4% 514 4.6% 109.6%
    PBIT margin 16.7%   17.1%    
    BPO service 490 4.8% 654 5.9% 33.3%
    PBIT margin 35.4%   54.0%    
    Others 184 1.8% 209 1.9% 13.6%
    PBIT margin 27.8%   26.3%    
    Total 10,219   11,165   9.3%
    PBIT margin 33.6%   38.9%    

  • The company derived 20%, 5% and 31% of its revenues in 1QFY09 from the US, Europe and ROW (rest of the world) regions respectively. It added 1,500 employees during the quarter, out of which 500 were freshers.

  • Tech Mahindra’s operating margins expanded by nearly 4% QoQ during 1QFY09. The margins have improved on account of better utilisation, cost containment, reduction in transitional cost and depreciation of rupee against the US dollar. However, wage inflation during the quarter negatively affected the margins.

  • Tech Mahindra’s bottomline grew by 18% QoQ during 1QFY09, excluding the impact of extraordinary items during previous quarter (i.e., Rs 4.4 bn upfront payments for taking over a large size deal from BT). A jump in tax expenses through inflicted some pressure on the profit growth (effective tax rate increased from 7% in 4QFY08 to almost 10% in 1QFY09).

  • During the quarter, Tech Mahindra clinched a US$ 700 m deal from BT, for which it had made upfront payment of Rs 4.4 bn during the quarter. The company has won this deal from BT Global Services for transformation of its IT systems. As per the contours of the deal, Tech Mahindra will assist the UK-based telecom and broadband conglomerate in transforming its IT infrastructure. The duration of the contract is 5 years.

What to expect?
At the current price of Rs 722, the stock is trading at a multiple of 7.6 times our estimated FY10 earnings. The management has indicated that they maintain a cautious view with regard to the ongoing economic crisis in the US. While a slowdown in the US and volatile 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. The recent addition of US$ 700 m contract in the kitty would drive its revenue going forward. However, the management has indicated that this new deal might take two to three quarters for transition before it starts adding to the topline. At these levels, we are positive on the stock from a long-term perspective. We shall soon update our research report on the company.

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