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Tech Mahindra: Debt plays spoilsport - Views on News from Equitymaster

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Tech Mahindra: Debt plays spoilsport

Jan 23, 2010

Performance summary
  • Topline grows by 4% QoQ in 3QFY10 on account of improved volumes in its ‘Telecom Service Provider (TSP)’ segment.
  • Operating margin declines by 1.7% QoQ during the quarter. This is on account of higher operating expenses, lower utilisation and rupee’s appreciation against the US dollar.
  • Bottomline grows by 2.3% QoQ during the quarter on the back of higher topline coupled with lower interest and tax outgoes. For 9mFY10, the bottomline has declined by 40% YoY on account of huge interest burden subsequent to the acquisition of Satyam.
  • Adds around 3,900 employees during the quarter thereby taking the total strength to 30,400 at the end of December 2009.

    Consolidated Financial Snapshot
    (Rs m) 2QFY10 3QFY10 Change 9MFY09 9MFY10 Change
    Sales 11,418 11,873 4.0% 34,134 34,421 0.8%
    Expenditure 8,520 9,066 6.4% 24,151 25,884 7.2%
    Operating profit (EBITDA) 2,898 2,807 -3.1% 9,983 8,537 -14.5%
    Operating Profit Margin (%) 25.4% 23.6% 29.2% 24.8%  
    Other income 270 6 -97.9% (456) 15  
    Interest 816 459 -43.7% 2 1,873  
    Depreciation 312 331 6.0% 811 939 15.8%
    Profit before tax 2,040 2,022 -0.9% 8,714 5,740 -34.1%
    Tax 345 285 -17.3% 873 898 2.9%
    Minority interest (5) (9) 69.2% 0 (22)  
    Extraordinary income/(expense) - - - 85  
    Profit after tax/(loss) 1,690 1,728 2.3% 7,841 4,735 -39.6%
    Net profit margin (%) 14.8% 14.6% 23.0% 13.8%  
    No of shares (m)       121.7 122.3  
    Diluted earnings per shares*#         57.6  
    P/E ratio#         19.7  
    # On a trailing 12-months earnings basis

    What has driven performance in 3QFY10?
    • Tech Mahindra recorded a 4% QoQ growth in topline during 3QFY10. This was driven by decent performance from its telecom service provider business (TSP, 86% of consolidated revenues), which grew by 5% QoQ. However, performance remained weak for the telecom equipment manufacturer (TEM) segment (6% of revenues). This recorded a QoQ decline of 17%. Performance of the BPO segment (6% of total revenues) also declined by 7% QoQ during the quarter. The company saw a decline of 4% in revenues from its top-client i.e., British Telecom, which itself has been impacted significantly by the global downturn. Nevertheless, Tech Mahindra remains the major outsourcing partner for BT, thereby winning a greater share in the decreased IT budget of its top-client.

    • The company derived 30%, 56% and 14% of its revenues in 3QFY10 from the US, Europe and ROW (rest of the world) regions respectively. Performance in the US market remained robust indicating some revival in the US telecom market. However, Tech Mahindra’s major market i.e., Europe remained plagued by weak sentiments and saw a decline of over 4% QoQ during the quarter. The company continued to see a lot of traction from the Middle-East, African, North American and Indian markets. It inked a number of deals centered around implementing network management system, customer service desks and other initiatives to drive operational efficiencies.

      Revenue Breakup
      (In Rs m) 2QFY10 3QFY10 Change
      On the basis of segments      
      Telecom service provider (TSP) 9,779 10,258 4.9%
      Telecom equipment manufacturer (TEM) 699 579 -17.1%
      BPO service 674 627 -7.0%
      Others 266 408 53.5%
      Total 11,418 11,873 4.0%
      On the basis of geography      
      US 3,243 3,562 9.8%
      Europe 6,954 6,649 -4.4%
      Rest of the world 1,222 1,662 36.1%

    • Operating margins contracted by nearly 2% QoQ on account of 6% increase in operating expenses. Increase in headcount coupled with a lower IT utilization rate (73%) impacted the margins.

    • Bottomline improved marginally by 2% QoQ during the quarter. This was primarily helped by a 44% decline in interest charge. During the quarter, the company repaid Rs 4.5 bn of debt from the fund worth Rs 9.7 bn generated as contract restructuring fees on certain long-term contracts with BT. The company had a total debt of Rs 17.4 bn on its accounts at the end of December 2009. A lower tax outgo also aided the bottomline. However, net profits for 9mFY10 declined 40% YoY on account of the huge debt burden incurred for funding Satyam’s acquisition.

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