Software services company Tech Mahindra is likely to record a double-digit on-quarter decline in profit because of a shrinking operating margin for the quarter ended June 2022 and a high base in corresponding previous quarter due to tax-related benefits.
Revenue growth in constant currency terms, however, may be in the range of 2-3.6 percent for the quarter on a sequential basis. The numbers will be released on July 25.
Since the record high, the stock has corrected 44 percent and has been in a downtrend, though there was an intermittent bounce back. Even after hitting June lows, it was a rangebound trade in the stock but there was a significant breakout of the long downsloping trendline on July 18, followed by a further run-up.
The stock has not only broken out of a long downward sloping trendline from its record high between (1,838 on December 30, 2021) and July 8, but also another downward sloping trendline between March 25 and July 8 this year, indicating some kind of bullish trend.
It is a seasonally weak quarter for Tech Mahindra due to seasonal weakness in its telecom business Comviva, while the growth is likely to be driven by the enterprise segment.
Kotak Institutional Equities, ICICI Direct and Sharekhan expect profit to decline in the range of 18-30 percent sequentially dented by operating profit margin.
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"Profit after tax is expected to decline 17.9 percent quarter-on-quarter due to weak operating performance and also due to tax-related one-time benefit in Q4FY22," ICICI Direct said.
On the top line front, the brokerages expect 3.2-3.6 percent sequential growth in revenue, and revenue growth in constant currency can be 2-2.6 percent QoQ.
"We forecast sequential revenue growth of 2.6 percent in constant currency driven by (1) 2.4 percent growth on an organic basis and (2) 20 bps contribution from Thirdware acquisition. Growth will be led by the enterprise vertical. Seasonal weakness in Comviva will lead to weaker growth in telecom," Kotak Institutional Equities.
The lower revenue growth, wage hike, an increase in travel expenses will be impacting the operating margin of the company during the quarter ended June 2022.
Kotak expects an EBIT margin decline of 210 bps QoQ and 400 bps YoY. "Sequential decline can be attributed to—(1) 120 bps from wage revision, (2) 90-100 bps from an increase in visa costs and Comviva seasonality, and (3) 50 bps+ from an increase in travel and G&A costs."
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ICICI Direct also feels EBIT margin is expected to decline by 206 bps QoQ on a sequential basis owing to wage revision, retention expenses, and increasing travel expenses, which will be partially offset by currency tailwinds.
The deal wins for the quarter ended June 2022 could be in the range of $750-800 million, the brokerages said.
Key things to watch out for would be a commentary on-demand environment amid the recent series of macro events; deal pipeline and win rates; attrition rates, telecom deal momentum especially related to 5G networks; commentary on enterprise business, especially the BFSI, healthcare, and manufacturing verticals; margin trajectory and pricing environment in light of supply-side pressures and increasing travel expenses; and M&A strategy and payout plans.
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