Thursday, November 8, 2012

Four factors that affected Tech Mahindras performance

Though Tech Mahindra  has reported a moderate increase in sales and headcount for the September 2012 quarter, it is more because of integration with recently acquired Hutchison Global Services. The core business still looks sluggish with sluggish growth in the dollar denominated revenue, stagnant number of software professionals on its payroll and reduction in client accounts. 

The company consolidated the performance of Hutchison Global for the month of September 2012. During the quarter, consolidated revenue rose sequentially by 5.7% to Rs 1,631.4 crore. Operating profit increased at a slower rate of 2.3% to Rs 337.7 crore reflecting higher selling and employee costs. Net profit fell by 26% from the quarter ago to Rs 139.4 crore due to higher foreign exchange loss. 
Though the integration with Mahindra Satyam (publicly listed as Satyam Computer Services) is expected to bring momentum to the combined entity, Tech Mahindra's core business continues to remain under pressure. Several factors raise concern over the company's existing business. 

Sluggish trend in dollar denominated revenueTech Mahindra's revenue in the rupee terms grew at a faster clip in the June and September 2012 quarters but mainly due to favourable rupee-dollar movement. Its core dollar denominated topline has remained range bound between $280 million and $300 million over the last six quarters. A prolonged slump in the global telecom sector, which is the only vertical of operations for Tech Mahindra, has impacted the company's performance. 

Tepid growth in the non-BT accountsUK based BT is the largest client of Tech Mahindra. Its contribution in the total income has declined steadily from 45% two years ago to 33% in the September 2012 quarter. However, the increase in other accounts has not been swift enough and hence the sluggish topline. 

Stagnant client baseOne of the major factors contributing to lacklustre sales growth is depressed growth in the number of client accounts. Its total active client base has been in the range of 120-130 since the last eight quarters. This has limited the revenue growth considering the significant scaling down in BT's account. 

Falling headcount and steep attritionTech Mahindra is among the few top-tier Indian IT exporters to have reported a drop in the number of software professionals on payroll. In the September 2012 quarter, its headcount fell to 24,224 from 26,665 a year ago. Attrition, though fell by 300 basis points sequentially, was still relatively higher at 16%. This paints a sombre picture about the future demand for the company.

While the short-term woes are likely to persist, the proposed integration with its subsidiary Satyam is expected to spruce up Tech Mahindra's performance in the medium term.

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