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Tech Mahindra (BOM:532755) |
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WIKI ANALYSIS
The company was incorporated in 1986 as Mahindra-British Telecom Limited, and subsequently, in February 2006, was re-christened as Tech Mahindra Limited. The company was formed as a joint venture between Mahindra & Mahindra (M&M) and British Telecommunications Plc. Its major focus areas are telecom service providers (TSP) and telecom equipment manufacturers (TEM). British Telecommunications is Tech Mahindra’s largest client which contributes more than 50% to company’s revenue. During FY09, the company acquired 42% stake in scam-hit Satyam in order to broaden its IT services portfolio in terms of offerings, industry verticals and geographies.
Tech Mahindra’s recorded a topline growth of 19% YoY growth during FY09. This was driven by growth in the TSP segment’s revenue which grew by 15% YoY during the fiscal (the segment contributes 87% to total revenues). Operating margins expanded by 6.8% YoY during FY09, aided by a higher share of offshore business and increased utilisation. Tech Mahindra’s net profits grew by 32% YoY during the fiscal.
Going forward, Tech Mahindra could face uncertainty about revenues from its top client BT. Moreover, the interest cost for Rs 24 bn debt that Tech Mahindra borrowed for Satyam’s acquisition is weighing heavily on Tech Mahindra’s profits. Though the true picture about Mahindra Satyam’s financial accounts is still to be unveiled, the company looks confident of leveraging the synergies between the two companies. It is confident of growth opportunities in the emerging economies particularly Middle-East and India, placing it as a leading player in the telecom vertical. With its well-diversified portfolio and potential of cross-selling across clients, Tech Mahindra is poised to weather the downturn and emerge out stronger.
| Consolidated Financial Performance | ||||||
| (Rs m) | 4QFY09 | 1QFY10 | Change | |||
|---|---|---|---|---|---|---|
| Sales | 10,513 | 11,130 | 5.90% | |||
| Expenditure | 7,671 | 8,325 | 8.50% | |||
| Operating profit (EBITDA) | 2,842 | 2,805 | (1.30%) | |||
| Operating Profit Margin (%) | 27.00% | 25.20% | ||||
| Other income | 78 | (261) | ||||
| Interest | 23 | 571 | ||||
| Depreciation | 286 | 296 | 3.30% | |||
| Profit before tax | 2,610 | 1,677 | (35.80%) | |||
| Tax | 306 | 268 | (12.50%) | |||
| Minority interest | (1) | (8) | ||||
| Extraordinary income/(expense) | () | (85) | ||||
| Profit after tax/(loss) | 2,303 | 1,316 | (42.90%) | |||
| Net profit margin (%) | 21.90% | 11.80% | ||||
| No of shares (m) | 121.9 | |||||
| Diluted earnings per shares*# | 72.8 | |||||
| P/E ratio# | 10.8 | |||||
| # On a trailing 12-months earnings basis | ||||||
| Segment-wise revenue breakup' | ||||||
| Revenues (Rs m) | 4QFY09 | 1QFY10 | Change | |||
|---|---|---|---|---|---|---|
| Telecom service provider(TSP) | 8,928 | 9,514 | 6.60% | |||
| Telecom equipment manufacturer (TEM) | 720 | 662 | (8.10%) | |||
| BPO service | 537 | 677 | 26.00% | |||
| Others | 327 | 278 | (15.10%) | |||
| Total | 10,512 | 11,130 | 5.90% | |||
| Geography - wise revenue breakup | ||||||
| Revenues (Rs mn) | 4QFY09 | 1QFY10 | Change | |||
|---|---|---|---|---|---|---|
| US | 2,103 | 3,228 | 53.50% | |||
| Europe | 7,885 | 6,789 | (13.90%) | |||
| Rest of the world | 526 | 1,113 | 111.70% | |||
Quarterly Result Analysis- Sept '09
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 | 2.60% | 22,812 | 22,548 | (1.20%) |
| Expenditure | 8,325 | 8,520 | 2.30% | 16,008 | 16,818 | 5.10% |
| Operating profit (EBITDA) | 2,805 | 2,898 | 3.30% | 6,804 | 5,730 | (15.80%) |
| Operating Profit Margin (%) | 25.20% | 25.40% | 29.80% | 25.40% | ||
| Other income | (261) | 270 | (59) | 9 | ||
| Interest | 571 | 816 | 2 | 1,414 | ||
| Depreciation | 296 | 312 | 5.60% | 525 | 608 | 15.80% |
| Profit before tax | 1,677 | 2,040 | 21.60% | 6,218 | 3,717 | (40.20%) |
| Tax | 268 | 345 | 28.80% | 603 | 613 | 1.60% |
| Minority interest | (8) | (5) | (2) | (13) | ||
| Extraordinary income/(expense) | (85) | ( ) | ( ) | 85 | ||
| Profit after tax/(loss) | 1,316 | 1,690 | 28.40% | 5,613 | 3,006 | (46.40%) |
| Net profit margin (%) | 11.80% | 14.80% | 24.60% | 13.30% | ||
| No of shares (m) | 122 | |||||
| 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.
- 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.
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