Says performance in June quarter would be hit by marginal decline in both revenues and operating margins due to a rise in H1-B visa costs and seasonal weak mobility business
New Delhi : Tech Mahindra, India’s fifth largest IT services exporter, warned that a seasonally weak mobility business and visa costs will impact its revenue in the April-June quarter, forcing the firm to resort to cost control measures and improving operational levers. The firm said it expects the margins to improve only by the third quarter of the current fiscal, 2015-16.
On this news, shares of the company plunged over 7 per cent to settle at Rs 484.35 on the BSE, wiping-out Rs 3,570 crore from its market valuation. During the day, it plunged 10.44 per cent to Rs 467.40 — its 52-week low.
“Q1 FY16 has some headwinds and tailwinds, which could see a risk of marginal decline in both revenue and EBITDA margin on a sequential basis,” the Mumbai-headquartered firm said in a regulatory filing.
“Seasonally weak mobility business will be a drag on Q1 (April-June of 2015-16) revenue and EBITDA. H1 B visa costs will be another drag on margins,” the firm said.
However, it added that favourable currency movements could help both revenue and margins. A senior official employed with a top IT services firm said that the first quarter is expected to be a weak one for almost all the IT firms.
Tech Mahindra’s anticipating an impact on its revenue and margins has been doing rounds in the market for some time and almost all the software services exporters are expected to be hit in April-June, he said.
“Due to macroeconomic headwinds, several clients in the US and Europe have been approaching their IT spending with caution and they are not committing a very large amount in one go. This affects the IT firm’s accounting as only the released amount can be put on the balance sheets, though it may be part of a large deal,” the official said.
Tech Mahindra is the third company after Persistent Systems and KPIT Technologies to warn about its weak earnings in the first quarter of FY 2015-16.
The firm also warned that “organisation wide there is renewed focus on improving operational levers and cost control parameters, however the impact is expected to be visible only from Q3 FY’16 (October-December) onwards”. The firm did not specify what the operational levers and cost control parameters.
However a market analyst said the company will look at trimming its project costs and will ask its project leaders to go ahead in a way that the earlier intended cost comes down.
On overall expectations for the IT services sector, he said the April-June quarter results are broadly expected to be a “little weak”. The analyst further said: “There is a bit of indecisiveness among the clients both in the US and Europe on committing to much funds as of now for IT spending.
“IT spending in the US will be good, but I expect this to show up somewhere in the middle of second quarter. In Europe there is much uncertainty over the economic revival and the Greece crisis is acting as a dampener.”
On its communication business, Tech Mahindra said the performance of this segment was good in 2014-15 showing organic constant currency growth of over 21 per cent in USD terms.
On margins, Tech Mahindra said that improving EBITDA margin is one of the top priorities of 2015-16.
“Target is to improve utilisation and recover wage hikes. Successful integration of newly acquired business — LCC and SofGen — is another key priority,” it added.
Tech Mahindra had disappointing earnings in the quarter ended March 31, 2015 after consolidated profit fell 39.2 per cent sequentially to Rs 472 crore, dented by lower margin and higher forex loss.
On the performance, Tech Mahindra Executive Vice Chairman Vineet Nayyar had said: “Our Q4 results were impacted by macroeconomic factors like cross currency headwinds and salary increases. We will endeavour to work on improving our operating metrics to achieve synergy with our recent acquisitions.”
