Tech Mahindra's net profit declines by 36% while revenues increase by 7% in the March quarter

Tech Mahindra Limited is engaged in the business of computer programming, consultancy, and related services. The Company's segments include Information Technology (IT) Services and Business Processing Outsourcing (BPO). The Company operates in various sectors, including telecom business and enterprise solutions business. The telecom business provides consulting-led integrated portfolio services to customers, which are telecom equipment manufacturers, telecom service providers and IT infrastructure services, and BPO, as well as enterprise services (banking, financial services and insurance (BFSI), retail and logistics, and manufacturing, among others) of IT and IT-enabled services delivered through a network of various locations around the world. The enterprise solutions business provides IT services, including IT-enabled services, application development, and maintenance, consulting and enterprise business solutions, extended engineering solutions, and infrastructure management services.

The share price of Tech Mahindra touched an Intraday high of 4% to Rs 550.15 on 30th April 2020 ahead of its earnings. The results were declared post market hours.

Tech Mahindra's Q4FY20 profit fell more than what the street has expected as Covid-19 pandemic stalled economic activity and spending across the globe.

The Profit After Tax (PAT) for the company stood at Rs 726 crores, down by 36% as compared to Rs 1,127 crores in the previous quarter ended in March 2019.

The board has also recommended a final dividend of Rs 5 for FY20 thus taking the total dividend including the interim dividend to Rs 15.

Key Highlights (YoY):

• Revenue increased by 7% to Rs 9,490 crores as compared to Rs 8,892 crores

• EBITDA declined by 20% to Rs 1,417 crores as compared to Rs 1,779 crores

• EBITDA margin and PAT margin contracted to 15% and 8% respectively

• Attrition rate improved from 21% to 19%

• Active Clients stood at 973, up by 35%

• Earnings per Share (EPS) stood at Rs 9.21 as compared to Rs 12.77

Q4FY20 has been a quarter where some of our metrics were impacted by environmental challenges. Till February the company had booked about $500 million of new contracts and in March continued to book business. So in simple terms, it was a quarter of 2 parts. The first 2 months were about business momentum and the last month was about COVID-19 impact. Thus the pandemic, and consequent lockdowns in India, the U.S., and European nations have disrupted the software services industry, impacting the business operations.

Segment-Wise Performance (YoY):

• IT revenue increased by 7% to Rs 8,668 crores as compared to Rs 8,108 crores

• BPO revenue increased by 5% to Rs 822 crores as compared to Rs 785 crores

• Revenue from America business stood at 48% as compared to 46%

• Revenue from Europe business stood at 27% as compared to 29%

• Revenue from Rest of the World stood at 26% as compared to 25%

Industry-Wise Performance (YoY):

• Communication vertical contributed 41% to revenue as compared to 43%

• Manufacturing vertical contributed 18% to revenue as compared to 20%

• Technology, Media and Entertainment vertical contributed 7% to revenue as compared to 8%

• Banking, Financial Services, and Insurance vertical contributed 15% to revenue as compared to 13%

• Retail, Transport, and Logistics vertical contributed 7% to revenue as compared to 6%

• Other business vertical contributed 12% to revenue as compared to 10%

“COVID19 has brought an unprecedented change in the business model for the IT industry. Ensuring the wellness of employees and contribute to society while maintaining business continuity under all circumstances continues to be our priority. While the demand traction seen through the first three-quarters of FY20 has reversed in Q4, we expect that the focus on Digital Transformation, Remote Working, and Network Modernization will recover in the medium term. The company has shown strong growth for FY20 and we remain committed to delivering sustainable solutions to our customers enabling them to adapt to New Normal” said CP Gurnani, Managing Director & Chief Executive Officer, Tech Mahindra.

Efficient operations, cost optimization, and delivery automation will be the key focus areas going into the next year. The strong balance sheet combined with a focus on cash conservation will help tide over the volatility in the near term, as Tech Mahindra looks to emerge stronger and leaner to capture opportunities ahead.

On the brighter side, the company's cash reserves i.e. cash and cash equivalents have increased from Rs 2,043 crores in March 2019 to Rs 3,017 crores and in terms of free cash flow at about $175 million, it is the second-highest quarter ever. The focus on collections, the focus on making sure that the company streamlines its operations and processes is something which is continuing, although the Day Sales Outstanding (DSO) is flat because the DSO is impacted both by the revenue line going down as well as some of the currency fluctuations.

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