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Tech Mahindra: Shadows of debt linger - Views on News from Equitymaster
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Tech Mahindra: Shadows of debt linger
Oct 20, 2009

Performance summary
  • Topline grows by 3% QoQ in 2QFY10 on account of improved volumes across its major business segments.
  • Operating margin remains flat at 25.4% during 2QFY10.
  • Bottomline grows by 28% QoQ during the quarter, on account of huge other income component.
  • Adds 1,033 employees during the quarter thereby taking the total strength to 26,515 at the end of September 2009.


Consolidated Financial Snapshot
(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 11,130 11,418 2.6% 22,812 22,548 -1.2%
Expenditure 8,325 8,520 2.3% 16,008 16,818 5.1%
Operating profit (EBITDA) 2,805 2,898 3.3% 6,804 5,730 -15.8%
Operating Profit Margin (%) 25.2% 25.4%   29.8% 25.4%  
Other income (261) 270   (59) 9  
Interest 571 816   2 1,414  
Depreciation 296 312 5.6% 525 608 15.8%
Profit before tax 1,677 2,040 21.6% 6,218 3,717 -40.2%
Tax 268 345 28.8% 603 613 1.6%
Minority interest (8) (5)   (2) (13)  
Extraordinary income/(expense) (85) -   - 85  
Profit after tax/(loss) 1,316 1,690 28.4% 5,613 3,006 -46.4%
Net profit margin (%) 11.8% 14.8%   24.6% 13.3%  
No of shares (m)         122.0  
Diluted earnings per shares*#         28.9  
P/E ratio#         25.7  
# On a trailing 12-months earnings basis

What has driven performance in 2QFY10?
  • Tech Mahindra recorded a 3% QoQ growth in topline during 2QFY10. This was driven by decent performance from its telecom service provider (TSP) and Telecom Equipment manufacturer (TEM) segments. The TSP business (86% of total revenue) contributed maximum to the growth as sales here grew by 3% QoQ during the quarter. TEM business (6% of total revenue) also recorded a healthy growth of almost 6% QoQ during the quarter. Performance of the BPO segment (6% of total revenue) declined marginally.

  • The company derived 28%, 61% and 11% of its revenues in 2QFY10 from the US, Europe and ROW (rest of the world) regions respectively. The performance in the European market saw some signs of revival as the revenues grew by 2.4% for the region. The company also saw a lot of traction from the Middle-East, African, North American and Indian markets. It entered into a number of deals centered on mobile number portability, greenfield GSM operations and system integration.

    Revenue Breakup
    (In Rs m) 1QFY10 2QFY10 Change
    On the basis of segments      
    Telecom service provider (TSP) 9,514 9,779 2.8%
    Telecom equipment manufacturer (TEM) 662 699 5.7%
    BPO service 677 674 -0.4%
    Others 278 266 -4.2%
    Total 11,130 11,418 2.6%
    On the basis of geography      
    US 3,228 3,243 0.5%
    Europe 6,789 6,954 2.4%
    Rest of the world 1,113 1,222 9.8%

  • Operating margins remained at nearly 1QFY10 levels. While there was an increase in expenditure in the form of wage hikes to the tune of 6% at offshore and 2% at onsite, a higher utilisation rate helped in maintaining margins.

  • Bottomline improved by 28% QoQ during the quarter. This was primarily helped by a huge other income component of Rs 270 m as against Rs 261 m loss on this account of hedging losses in the previous quarter. The huge interest costs of Rs 816 m however dented the bottomline a bit. The company had a debt of Rs 21.8 bn on its books at the end of September 2009. It refinanced Rs 11.5 bn of its debt during the quarter, bringing down the effective interest rate to 8.7% per annum. This will reduce the interest outlay going forward.

What to expect?
At the current price of Rs 951, the stock is trading at a multiple of 13.2 times its trailing 12-months earnings. The company has been aggressive in its approach towards growth, which is evident from its acquisition of 42.7% stake in Satyam (now Mahindra Satyam) through a net borrowing of Rs 24 bn. In the recent quarters, it has been able to leverage the synergies between the two companies in wining a number of new deals. However, the management remains candid about the fluid situation at Mahindra Satyam, which will remain a little unclear for next 4 to 5 months until its accounts are restated.

During the conference call, the management was enthused with the definitive signs of recovery in sentiment it saw during the quarter. There was a significant jump in number of Request for Proposals (RFPs) but the decision-making continued to remain prolonged and pricing was constrained. Nevertheless, the company saw a lot of traction for its services in the emerging markets where sales grew by 13% QoQ. Moreover, 2QFY10 was the first quarter when company’s non-BT business (from clients other than the top client i.e., British Telecom) contributed more than 50% to the topline. This is a good sign indicating the company’s effort in reducing dependence on BT. Moreover the company revised some contracts with BT ensuring more share of IT outsourcing work from BT.

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