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Tech Mahindra: Cost control aid margins - Views on News from Equitymaster
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Tech Mahindra: Cost control aid margins
Oct 22, 2008

Performance summary
  • Topline grows by 4% QoQ in 2QFY09 led by growth in the TSP (telecom service providers) business.

  • Operating margins expand by 8% QoQ during the quarter on the back of lower traveling expense, better utilisation and rupee’s depreciation against the US dollar.

  • Bottomline grows by 17% QoQ during the quarter.

  • Adds 766 employees during 2QFY09 thus taking the total strength to 25,100 at the end of September 2008.



Consolidated Financial Snapshot

(Rs m) 1QFY09 2QFY09 Change 1HFY08 2HFY09 Change
Sales 11,164 11,648 4.3% 17,739 22,812 28.6%
Expenditure 8,296 7,713 -7.0% 13,834 16,008 15.7%
Operating profit (EBITDA) 2,868 3,935 37.2% 3,905 6,804 74.2%
Operating Profit Margin (%) 25.7% 33.8%   22.0% 29.8%  
Other income 261 (320)   380 (59)  
Interest 2 0 -88.9% 41 2 -95.1%
Depreciation 258 267 3.7% 361 525 45.4%
Profit before tax 2,869 3,348 16.7% 3,884 6,218 60.1%
Tax 282 321 13.8% 369 603 63.3%
Minority interest (2) 1 -155.6% 5 (2) -140.8%
Profit after tax/(loss) 2,585 3,028 17.1% 3,519 5,613 59.5%
Net profit margin (%) 23.2% 26.0%   19.8% 19.8%  
No of shares (m)       121.3 121.7  
Diluted earnings per shares*         44.3  
P/E ratio*         9.4  
* On a trailing 12-months earnings basis

What has driven performance in 2QFY09?
  • Tech Mahindra recorded a 4% QoQ growth in topline during 2QFY09 mainly on account of growth in its TSP segment. TSP segment contributes 88% to the company’s total revenue and has grown by 5% QoQ during the quarter. The Telecom Equipment Manufacturer (TEM) segment also registered healthy growth (8% QoQ). However, BPO segment recorded a decline of 3% QoQ.

    Segment-wise Detail

    Revenues (Rs m) 1QFY09 % Share 2QFY09 % Share Change  
    Telecom service provider (TSP) 9,787 87.7% 10,226 87.8% 4.5% 3.9%
    PBIT margin 39.3%   41.1%      
    Telecom equipment manufacturer (TEM) 514 4.6% 552 4.7% 7.5% 0.4%
    PBIT margin 17.1%   26.1%      
    BPO service 654 5.9% 636 5.5% -2.8% -0.2%
    PBIT margin 54.0%   56.7%      
    Others 209 1.9% 234 2.0% 11.8% 0.2%
    PBIT margin 26.3%   30.6%      
    Total 11,164   11,648   4.3% 0.0%
    PBIT margin 38.9%   41.1%      

  • The company derived 23%, 69% and 8% of its revenues in 2QFY09 from the US, Europe and ROW (rest of the world) regions respectively. Tech Mahindra has grown its revenue from ROW region significantly by 39% QoQ. The company has also seen revenue growth of 9% QoQ in the North American region. However growth from the European region was a bit flattish during the quarter.

  • Tech Mahindra’s operating margins expanded by nearly 8% QoQ during 2QFY09. These have improved on account of better utilisation, cost containment (especially 57% QoQ decline in traveling expense) and depreciation of rupee against the US dollar.

  • Tech Mahindra’s bottomline grew by 17% QoQ during 2QFY09. The bottomline has grown mainly on account of higher growth in operating profit. However, growth would have been higher on account of forex losses.

What to expect?
At the current price of Rs 415, the stock is trading at a multiple of 5.9 times our estimated FY11 earnings. The management has indicated that they maintain a cautious view with regard to the ongoing economic crisis in the US. It has also indicated that revenue from the BT Global Services deal has peaked out and that the latter is mulling to cost cut which can have an impact on the company. The company is diversifying its offerings in the telecom space networking and communication front which is expected to drive growth going forward.

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