TechM profit declines over high costs, beats estimates on revenue front

Tech Mahindra reported a net profit of Rs 1,131.6 crore, down 16.3 per cent year-on-year (YoY), for the first quarter of FY23. The profit declined 24.8 per cent on a sequential basis. The company’s revenue at Rs 12,708 crore was up 24.6 per cent from Rs 10,197 crore reported a year ago. Sequentially, its top line was up 4.9 per cent.

Higher employee and subcontractor costs impacted the operating margin performance, which came in at 14.8 per cent -- down 3.6 percentage points YoY and 2.4 percentage points quarter-on-quarter (QoQ).

Tech Mahindra’s dollar revenue for the quarter stood at $1,632 million, up 1.5 per cent sequentially (or up 18 per cent YoY). In constant currency terms, its revenue growth stood at 3.5 per cent QoQ.

Like most of its peers, Tech Mahindra beat revenue estimates but disappointed on the net profit and margin fronts. The company’s revenue beat Bloomberg estimates of Rs 12,524 crore but missed the net income estimates of Rs 1,215 crore.

The pressure was also evident on total contract value (TCV), which came in at $802 million -- down 21 per cent YoY. Sequentially, too, TCV was down by 1.6 per cent.

But the management said it was confident of growth in FY23. C P Gurnani, managing director & chief executive officer, Tech Mahindra, said: "We are starting this financial year with a renewed commitment towards delivering consistent organic growth. We remain resilient and watchful, given the dynamic global macro-economic environment, and will continue to invest in new and emerging technologies to deliver differentiated offerings." 

But analysts were disappointed with Tech Mahindra’s performance. “TechM reported a subdued Q1FY23 performance. The margin and PAT, both were below our expectations and this clearly indicates pressure on the supply side, as well as pricing. We expect both telecom and enterprise verticals to witness healthy growth on the back of a step-up in 5G capex and mid-term resiliency in technology demand. We believe TechM will be the key beneficiary of medium-term themes, such as software-defined network (SDN) and telecom IT modernisation. However, lower deal wins, utilisation, and wage inflation would continue to exert margin pressure. A likely cut in the margin and earnings is on the cards,” said Mitul Shah, head of research at Reliance Securities.

The big positive was the reduction in the attrition rate, which came in at 22 per cent, down from 24 per cent in Q4FY21. However, it was still high when compared with 17 per cent in Q1FY22. The company hired 6,862 freshers in Q1, against 6,106 in Q4FY22.

With about $900 million being invested in acquisitions in FY22, the management said during FY23, it will focus on integrating and consolidating these acquisitions.

What the numbers say

• Margins down due to employee and subcontractor costs 
• Attrition down to 22%, from 24% in Q4FY22 
• TCV at $802-mn, down 1.6% QoQ and 21% Yoy 
• Growth drivers: US (4.4% qoq), technology (6.4%), retail, transport and logistics (5.5%) 
• Euorpe was down 1.9% QoQ and BFSI declined by 2.9% QoQ