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Tech Mahindra: A disappointing operating performance - Views on News from Equitymaster
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  • Aug 20, 2014 - Tech Mahindra: A disappointing operating performance

Tech Mahindra: A disappointing operating performance
Aug 20, 2014

Tech Mahindra has announced its first quarter results for the financial year 2014-2015. The company reported a 1.3% QoQ growth in consolidated sales and a 2.7% 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 1.3% QoQ. In US dollar terms, growth in revenues was 3.7% QoQ. The appreciation of the Indian rupee against the US dollar adversely impacted the topline performance in the quarter.
  • Operating expenses increased by 5.2% QoQ. Employee costs, travel expenses and subcontracting costs increased by 3.6%, 24% and 13.9% (all QoQ) respectively. Thus the EBITDA (Earnings before interest, tax, depreciation and amortization) fell by 13.4% QoQ and the EBITDA margin decreased by 3.1% QoQ to 18.1% at the end of 1QFY15.
  • The company's net profit grew by 2.7% QoQ. The net margin improved marginally from 12.1% in 4QFY14 to 12.3% in 1QFY15.
  • The company's employee base stood at 92,729 at the end of June 2014, recording a growth of 6% QoQ.
  • The total number of active clients increased from 629 at the end of 4QFY14 to 632 at the end of 1QFY15. These clients contributed 99% of repeat business in1QFY15 up from 97% in 1QFY14.

Consolidated Financial Snapshot
(Rs m) 4QFY14 1QFY15 Change
Sales 50,581 51,215 1.3%
Expenditure 39,863 41,931 5.2%
Operating profit (EBITDA) 10,719 9,284 -13.4%
Operating Profit Margin (%) 21.2% 18.1%  
Other income (866) 893  
Interest 98 41 -58.0%
Depreciation 1,429 1,492 4.4%
Exceptional items - -  
Profit before tax 8,325 8,644 3.8%
Tax 2,091 2,308  
Minority interest 91 29 -68.8%
Profit from assosiates - -  
Profit after tax/(loss) 6,142 6,307 2.7%
Net profit margin (%) 12.1% 12.3%  
No of shares (m)   234.4  
Diluted earnings per shares   126.9  
P/E ratio#   17.4  
# On a trailing 12-months earnings basis

What has driven performance in 1QFY15?
  • Tech Mahindra recorded a solid 3.7% QoQ growth in sales in US dollar terms. The US geography was quite clearly the reason for the topline performance. It was also heartening to note that all verticals contributed equally to the growth.

    Revenue breakup
    (Rs m) 4QFY14 1QFY15 Change
    On the basis of industry
    Telecom 25,291 25,608 1.3%
    Manufacturing 9,105 9,219 1.3%
    Tech, Media and Entertainment 4,552 4,609 1.3%
    Banking, Financial Services and Insurance 5,058 5,122 1.3%
    Retail, transport and logistics 3,035 3,073 1.3%
    Others 3,035 3,073 1.3%
    On the basis of geography
    US 22,761 24,071 5.8%
    Europe 15,680 15,877 1.3%
    Rest of the world 12,139 11,267 -7.2%
What to expect?
Tech Mahindra continues to clock good topline growth. However, the margins of the company have slipped over the last few quarters. This has been due to a combination of factors. Wage hikes, visa costs, declining employee utilisation and a rise in the percentage of onsite revenues are to blame. None of these issues are short term in nature. The management has made a conscious decision to go for large enterprise services projects all over the world. While this has a positive impact on the geographic and vertical breakup of revenues, it does impact margins. The management has stated that they will look to get the margins back up over the next few quarters but we believe that it will be a herculean task for the management to get the margins back above 20% soon. The margins that we have seen over the last two quarters could be the 'new normal' for the company.

The company continues to drive topline growth from both the telecom business and the enterprise business. The order book also remains strong. However, there are several risks to the aggressive growth strategy that the management is following.

The fundamentals of Tech Mahindra remain sound. 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 recommend investors do not buy the stock at these levels.

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