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Tech Mahindra: Good performance delivered - Views on News from Equitymaster

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Tech Mahindra: Good performance delivered

Aug 12, 2013

Tech Mahindra announced its first quarter results for the financial year 2013-2014 (1QFY14). The Company reported an 8.9% QoQ growth in consolidated sales and a 7.6% QoQ growth in net profits. The financials include the combined data of erstwhile Tech Mahindra and Mahindra Satyam. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 8.9% QoQ. In terms of US dollar revenues, growth in sales was 3.7% QoQ.
  • EBITDA (Earnings before interest, tax, depreciation and amortization) margin increased by 0.6% QoQ to 21.1% at the end of 1QFY14. That was because the operating expenditure (Cost of Services and Selling, General and Administrative Expenses) grew at a slower pace of 8.1% QoQ as compared to the sequential increase in revenues. On an absolute basis, EBITDA grew by 12.1% QoQ.
  • The bottom-line grew by 7.6% QoQ. The increase in net profits would have been even higher had the effective tax rate not increased from 18.3% in 4QFY13 to 25% in 1QFY14.
  • The Company's employee base stood at 83,063 at the end of June 2013.
  • The total number of active clients increased from 516 at the end of 4QFY13 to 567 at the end of 1QFY14.

(Rs m) 4QFY13 1QFY14 Change
Sales 37,673 41,032 8.9%
Expenditure 29,960 32,387 8.1%
Operating profit (EBITDA) 7,713 8,645 12.1%
Operating Profit Margin (%) 20.5% 21.1% 0.6%
Other income 381 2073 444.1%
Interest 253 223 -11.9%
Depreciation 1,207 1,174 -2.7%
Exceptional items 1,340 - -100.0%
Profit before tax 7,974 9,321 16.9%
Tax 1,461 2,328 59.3%
Minority interest 137 130 -5.1%
Profit after tax/(loss) 6,376 6,863 7.6%
Net profit margin (%) 16.9% 16.7% -0.2%
No of shares (m)   231.9  
Diluted earnings per shares   29.6  
P/E ratio#   14.8  
# On a trailing 12-months earnings basis

What has driven the performance in 1QFY14?
  • Tech Mahindra recorded an 8.9% QoQ growth in its net consolidated sales during the quarter. This was driven by 8.9% QoQ growth in the 'Telecom' (48% of total sales), 'Manufacturing' (19% of total sales), 'Tech, Media and Entertainment' (12% of total sales) and 'Retail, Transport and Logistics' (6% of total sales) respectively. The 'Others' (6% of total sales) segment saw a growth of 30.7% QoQ while 'Banking, Financial Services and Insurance' (9% of total sales) saw a de-growth of 2% QoQ.

  • During the quarter, Tech Mahindra derived 45%, 32% and 23% of its revenues from the US, Europe and RoW (Rest of the World) regions respectively. The revenues from US increased by 16.7% QoQ during 1QFY14 while revenues from Europe registered a growth of 5.6% QoQ. Revenues from RoW registered a growth of 0.2% QoQ.

    (Rs m) 4QFY13  1QFY14  Change 
    On the basis of industry
    Telecom 18,083 19,695 8.9%
    Manufacturing 7,158 7,796 8.9%
    Tech, Media and Entertainment 4,521 4,924 8.9%
    Banking, Financial Services and Insurances 3,767 3,693 -2.0%
    Retail, transport and logistics 2,260 2,462 8.9%
    Others 1,884 2,462 30.7%
    On the basis of geography
    US 15,823 18,464 16.7%
    Europe 12,432 13,130 5.6%
    Rest of the world 9,418 9,437 0.2%

  • Tech Mahindra's EBITDA margin increased by 0.6% QoQ to 21.1% at the end of 1QFY14. As pointed out earlier, that was because operating expenditure increased at a slower pace as compared to the growth in revenue. On an absolute basis, EBITDA grew by merely 12.1% QoQ.

  • The company's utilization levels decreased by 1% to 76% at the end of 1QFY14.The attrition level also decreased by 1% to 15% at the end of 1QFY14.

  • Tech Mahindra's net profits improved by 7.6% QoQ during the quarter. The growth in net profit would have been higher had the effective tax rate not increased from 18.3% in 4QFY13 to 25% in 1QFY14.
What to expect?
At today's closing price of Rs 1,337.75, Tech Mahindra's share is trading at a multiple of 14.8 times its trailing twelve months earnings.

This was the first quarter in which the merged financials of Tech Mahindra and Mahindra Satyam were reported. It was good to note from the management that the integration of various processes which was going on from quite some time is complete. Thus, synergies should follow in the medium term. The benefits of cross-selling seemed to be in place as deal flow picked up.

As per the management the current customers and markets are offering more business to the company. A focus on BPO operations has been in place since the last year, boosted by the acquisition of HGS. The management has emphasized that the focus on BPO offerings would remain. With regard to the growth of the other verticals, the management has stated that the inorganic route, i.e. acquisitions, should also form a part of the strategy to grow the top-line.

4 large deals were closed in the last quarter although details with regard to their amount were not shared.

While BT still remains the top client, the management has stated that details with respect to revenues emanating from BT will not be shared henceforth. The fall in revenue from BT, which has been happening since the last year is expected to continue, however, synergies from the merger and acquisitions should be more than enough to compensate for the downfall. The operating margin is also expected to remain stable at 20-21% going forward.

We maintain our 'Hold' recommendation on the stock and 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 equities portfolio.

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