News Analysis

Tech Mahindra fails to deliver

Rajalakshmi Nirmal BL Research Bureau | Updated on January 09, 2018 Published on August 01, 2017

Three quarters ago, it seemed like the worst was over for Tech Mahindra and its telecom vertical (that contributes over half of its revenue) was set to recover. But much to investors' disappointment, the company has failed to deliver as per expectations.

In the recent June quarter, Tech Mahindra’s dollar revenue grew 0.6 per cent sequentially. This is the lowest growth figure among all the top-tier IT companies that have declared their results so far.

The telecom (communication) vertical has lost momentum. From a sequential growth (in dollars) of 2.27 per cent in the September quarter last year, the segment’s growth dropped to 1.71 per cent in the December quarter. It further slipped to a negative of 0.79 per cent in the March quarter. In the latest June quarter, the vertical has recorded a sharper decline of 1.8 per cent.

The number of active clients with the company increased to 864 in the June quarter from 843 in the March quarter. However, most of the additions were in the $1 million-plus (less than $5 million deals) bucket. Revenue from top five clients declined to 25.9 per cent from 26.6 per cent in the previous quarter.

The total employee base shrunk by 1,713 employees to 1,17,693.

The company has however managed a 36 per cent sequential profit growth, thanks to forex gains and increase in other income. Operating profit margins increased by 70 basis points to 12.7 per cent. The increase though not very significant, has found favour with investors. The stock has gained 5 per cent in bourses today.

Outlook

In the post results commentary yesterday, the management had sounded optimistic of the prospects in the current year with all recent acquisitions expected to pay off.

It expects LCC (Lightbridge Communications Corporation), a global network services company, acquired in 2014, to break-even in the coming quarters as the restructuring is over.

On the margin front too, there may be an improvement, said the company, as it works on possible levers – employee utilisation, automation and improving profitability at LCC. In the September quarter, though, there may be some impact on margins because of wage hikes.

Only if the new acquisitions made by the company in the last one year, start to add to revenues materially, the company can bridge its gap with peers in the coming quarters.

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