US Market, Digital Tech Drive Tech Mahindra's Growth

by CXOtoday News Desk    Jul 28, 2015

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India’s fifth largest IT services company Tech Mahindra’s Q1 revenue quarter numbers were better than market expectations, with a 0.5% sequential growth in dollar revenues. Tapping the right market and technologies this quarter has played a key role in the success of the 

When shares of  Tech Mahindra fell over 14% last quarter, its sharpest fall since January 2009, CFO Milind Kulkarni said in an interview, “One cannot judge a company on the basis of Q4 performance” and added that “digital business will propel it as a future leader.”

This quarter his prophecies turned out to be true as the company not only earned a 5.6% revenue growth from the US, but also clocked a 6.4% growth - through its recent acquisition of SOFGEN - over the previous quarter on its enterprise segment. The US market did well against 5% growth for Infosys and 4.4% for TCS. This helped in neutralizing the impact of de-growth in Europe (down 0.7%) and Middle East and Africa (down by 7.4%), the company reports.

The digital route

The company is largely betting on digital route. It is entering into new partnerships with core digital capabilities to remain relevant in its key verticals such as Telecommunications, Oil& Energy and healthcare & Life Sciences. Despite about 1% gain from cross currency movements, Tech Mahindra reported a 30 basis points dip in margins to 14.8% per cent (from 15 per cent in the March quarter and 20% in the December quarter due to increase in visa costs and some margin stress in the mobility business (about 2.3%).

The share of onsite revenues increased sharply to 61% from 56.3% in the March quarter and added to the margin pressure, the quarterly report states.

However, it is the improved operational metrics and better utilization rate that helped it get away with a minor drop in margins. Moreover, analysts believe stronger execution by the management and Indian IT companies strengthening their capabilities in the digital space. “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.

The addition in the total headcount was only 392. But, at 74%, the utilization rate was up three percentage points from the March quarter.

Growth from US

The IT major also suffered losses last quarter owing to its 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 in April.

Reportedly, 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 last time. However, TCS said it will build more technology development facilities in the United States its largest market, for faster delivery of services to clients and boost local hiring to tap new business opportunities linked to digital technologies.

“We are investing heavily in building local delivery centres in the US. We’ve opened two in Canada and six in the United States over a period of the past six or seven months,” C.P. Gurnani told Reuters in an interview, with a source even quoting that the company was planning to hire about 100 in each quarter in the US.

Tech Mahindra has given a positive outlook on the deal pipeline and prospects for its communications business in the coming quarters. The company added five clients in the $5 million plus bucket.

Companies in India’s $150 billion IT outsourcing industry operate most of their facilities in India and use a large pool of qualified, cheaper workforce to provide services to clients in the United States and Europe. In an interview with CNBC-TV18, Vineet Nayyar informed that the IT major would require series of initiatives including rationalizing staff, including offshoring in some measures, including better implementation, use of new technology because remember that we have our specialization as technology. So, rather than using the older methods we would be using the new methodologies.