Poor Q4 Prompts Tech Mahindra To 'Go Digital'

by CXOtoday News Desk    May 27, 2015


Digital is the way ahead for every enterprise dealing with traditional IT services. When shares of India’s fifth largest IT services company Tech Mahindra fell as much as 14.12 percent, its sharpest fall since January 2009, after the company reported heavy loss in its Q4 earnings, the firm promptly relied on the digital route. In an interview with to CNBC-TV18, Milind Kulkarni, chief financial officer (CFO) of Tech Mahindra said, in the coming quarters, the company is looking to grow its digital business. “One cannot judge a company on the basis of Q4 performance and added that digital business will propel it as a future leader,” he mentioned.

What led to the fall?

The company’s consolidated net profit for the quarter reportedly declined to Rs 472 crore at 23 percent versus Rs 614.2 crore in the year-ago period. Organic revenue fell 4.35 percent in dollar terms compared with the December quarter. The company reported a massive 500 basis points sequential decline in operating profit margin, far higher than the 250-270 basis points impact most analysts had estimated. The loss is impacted by cross currency headwinds and salary hikes, the company said.

Tech Mahindra is controlled by Mahindra & Mahindra Ltd., India’s biggest maker of utility vehicles. It acquired Satyam Computer Services Ltd., the Hyderabad-based software maker that was at the center of India’s biggest corporate fraud.

The numbers were “impacted” by wage increases and some unfavorable movements in currencies, the company said in a statement. The country’s two biggest IT firms, TCS and Infosys also reported sales that missed estimates as spending on IT worldwide shrinks amid cost cuts.

“We have relatively large proportions of business in Europe, Canada, Australia and New Zealand and these were the countries that suffered the maximum slowdown,” Executive Vice-Chairman Vineet Nayyar, told analysts on a call.

Sarabjit Kour Nangra of Angel Broking said the company has booked in some Forex loss which has also impacted but major part has been something to do with other expenses. I don’t know what classifications hit them badly. So, these two accounts are major ones even though employee expenses have increased quarter-on-quarter (QoQ).

A Digital Future

Revenue for the quarter was up 20.9 per cent at Rs 6,116.8 crore from Rs 5,058.1 crore in the same quarter last year. On a sequential basis, the company’s top line grew about 6.4 per cent. However, organic revenue for the year de-grew by 1.2 per cent, raising questions on whether the company’s stock would get higher valuation multiple. The revenue was slightly lower than Bloomberg consensus estimate of Rs 6,143 crore.

Kulkarni stated, “We have taken all spheres of technology in the digital world and taken that progress forward. If you look at whether this is going to drive the next profits or not, digital business will definitely be the fastest growing because naturally it runs off a smaller base for our customers. It also has the huge opportunity to propel us to be the future leaders for the way these businesses are going to transform and that is where we want to position ourselves.”

Still, many say that stronger execution by the management and Indian IT companies strengthening their capabilities in the digital space will help them offset slowdown blues.
“We believe Tech Mahindra is benefiting from its expanded offering, sales and leadership teams, an improved deal pipeline, and a credible inorganic and digital strategy,” BNP Paribas analyst Abhiram Eleswarapu wrote in an industry note earlier this year.
CP Gurnani, CEO, Tech Mahindra said the company will focus on improving its EBITDA margins and look at utilisation, and obtain better synergies by integrating its telecoms and enterprise businesses, an area where digital technologoes can have a bigger role to play.