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Tech Mahindra: A quarter of good growth - Views on News from Equitymaster
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Tech Mahindra: A quarter of good growth
Nov 20, 2014

Tech Mahindra has announced its second quarter results for the financial year 2014-2015. The company reported a 7.2% QoQ growth in consolidated sales and a 14.1% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 7.2% QoQ. In US dollar terms, growth in revenues was 5.2% QoQ.
  • Operating expenses increased by 4.7% QoQ, lower than the growth in sales. Thus, the EBITDA (Earnings before interest, tax, depreciation and amortization) increased by 18.2% QoQ. The EBITDA margin improved to 20% compared to 18.1% at the end of 1QFY15.
  • Largely due to the good operating performance, the company's net profit grew by 14.1% QoQ.

Consolidated financial snapshot
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Sales 51,215 54,879 7.2% 88,747 106,094 19.5%
Expenditure 41,931 43,906 4.7% 68,992 85,837 24.4%
Operating profit (EBITDA) 9,284 10,973 18.2% 19,756 20,257 2.5%
Operating profit margin (%) 18.1% 20.0%   22.3% 19.1%  
Other income 893 576 -35.5% 2,454 1,468 -40.2%
Interest 41 41 -0.5% 465  82 -82.3%
Depreciation 1,492 1,425 -4.5% 2,396 2,917 21.7%
Exceptional items - -   - -  
Profit before tax 8,644 10,083 16.7% 19,349 18,727 -3.2%
Tax 2,308 2,807 21.6% 5,168 5,114 -1.0%
Minority interest 29 80 181.4% 134 109 -18.6%
Profit from assosiates - -   - -  
Profit after tax/(loss) 6,307 7,196 14.1% 14,047 13,504 -3.9%
Net profit margin (%) 12.3% 13.1%   15.8% 12.7%  
No of shares (m)         235.5  
Diluted earnings per share         126.3  
P/E ratio#         20.8  
# On a trailing 12-months earnings basis

What has driven performance in 2QFY15?
  • Tech Mahindra recorded a solid 5.2% QoQ growth in sales in US dollar terms. In terms of business verticals as well as geographies; the growth was fairly broad based.

    Revenue breakup
    (Rs m) 1QFY15 2QFY15 Change
    On the basis of industry
    Communications (earlier Telecom) 26,120 28,537 9.3%
    Manufacturing 9,219 9,878 7.2%
    Tech, Media and Entertainment 4,609 4,390 -4.8%
    Banking, Financial Services and Insurance 5,122 5,488 7.2%
    Retail, Transport and Logistics 3,073 3,293 7.2%
    Others 3,073 3,293 7.2%
    On the basis of geography
    US 24,071 26,891 11.7%
    Europe 15,877 17,012 7.2%
    Rest of the world 11,267 10,976 -2.6%

  • In terms of operating performance, the growth in employee, travel and SG&A expenses were all contained in the quarter on a sequential basis. This helped to boost margins in 2QFY15. However, as we stated at the time of the 1QFY15 results, maintaining margins at these levels will be a big challenge for the company.

  • The operating performance certainly boosted the bottomline as well. The net profit was up 14.1% QoQ. The net margin improved to 13.1% compared to 12.3% at the end of 1QFY15.
What to expect?
At the price of 2,626 the stock of Tech Mahindra trades at 20.8 times its trailing twelve months earnings.

Tech Mahindra had a good quarter in 2QFY15 driven by the 5.2% QoQ growth in the topline in US dollar terms. The margins received a boost due to better control over general and administrative costs on a sequential basis. However, it must be kept in mind that the December quarter is a seasonally weak quarter for Indian IT firms. Thus, if the topline growth is not sustained then it will be tough for the company to maintain margins.

The enterprise segment (i.e. non-telecom) witnessed good traction in the quarter with three large deals being signed. In all, the company signed 7 large deals in the quarter with one more being closed just after the quarter ended. The total value of these deals is about US$ 270 m. The company has a policy of going after 10-12 large deals at any given point of time. That was the case in 2QFY15 as well. However, the management stated that they could provide details only after the deals are signed.

The company's prowess in the telecom domain will hold it in good stead. The challenge for the company will be winning large deals in other verticals to drive growth. The signals from the management have been mixed in this regard. The company's skill and domain expertise in the non-telecom verticals is still not up to the level of its peers.

The acquisition strategy is also quite aggressive we believe. This brings in an element of risk to the business model, especially to the margins.

The fundamentals of Tech Mahindra are 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 there is no margin of safety for investors at current levels. Therefore we maintain that investors should not buy the stock at these levels.

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