Tech Mahindra Q1 Results: Net profit down 38% YoY to Rs 693 crore

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IT services company Tech Mahindra saw its revenue fall by 4 percent sequentially to $1600.7 mn (Rs 13,159 crore) missing analyst estimates, in a quarter that has been a washout among all the large IT companies. However, Tech Mahindra's revenue has fallen 4.2 percent in constant currency terms, making this the steepest fall among its peers. Wipro and HCLTech also saw a decline in revenue this quarter.

This was evidenced by Chief Executive Officer CP Gurnani's statement that this is one of the toughest quarters he has seen in the last five years.

Tech Mahindra reported a 38 percent year-on-year decline in net profit which stood at Rs 692.5 crore for the first quarter ended June 30, as compared to the same quarter in the last fiscal year, when it stood at Rs 1,147.5 crore. Sequentially, the decline was 38 percent, as compared to the net profit of Rs 1,125 crore reported in the fourth quarter of the last fiscal year.

The company's margins were a big miss, and fell way more than what was estimated. EBIT margins came in at 6.8 percent, a fall of 440 bps from last quarter's 11.2 percent, making this also the weakest among its peers. Defending its margins is something that Tech Mahindra has continued to struggle with as it has remained the lowest among its peers.

Of the 440 bps impact, CFO Rohit Anand said that 200bps was due to drop in service revenue (primarily in communications), around half a percent due to seasonality in Comviva (subsidiary servicing telecom clients), and a one-time impact of 200bps due to a "certain customer situation going into bankruptcy proceedings" for which the company had to make a provision.

The company's total contract value (TCV) or deal wins stood at $359 mn, down from $592 mn (-39.36 percent) in the last quarter, and $802 mn (-55.24 percent) in the same quarter last year.

The troubled times that Tech Mahindra finds itself are also seen in its net addition numbers, with its headcount having shrunk sequentially by 4,103. This is the third consecutive decline for Tech Mahindra, during which it has seen its headcount reduce by over 15,000 employees on a net basis.

This comes even as the company's attrition has fallen to 13 percent, the lowest among its peers, and its utilisation is at 87 percent.

CEO and MD CP Gurnani said in a statement that the company's numbers this quarter "reflects the uncertainty in the global economy and the IT sector."

"We are confident that we have the right strategy and the right team to overcome this temporary setback and deliver longterm value for our customers and shareholders," he said.

Chief Financial Officer Rohit Anand said this quarter was a challenging one. "This quarter was a challenging one for us as revenue growth faced strong headwinds and that had an impact on profitability. We have taken swift and decisive actions to address these issues and improve our execution.

Among its verticals, the steepest fall was seen in the Communications, Media and Entertainment vertical, the largest for Tech Mahindra, as revenue from the industry declined by 9.4 percent sequentially. Banking, Financial Services and Industry fell by 3.2 per cent, and Retail by 0.3 percent, while Manufacturing grew by 1.8 percent and Technology was flat at 0.1 percent.

By geographies, Europe saw revenue decline of 6.7 percent, Americas by 0.5 percent and Rest of World by 8.2 percent.

Incoming Chief Executive Officer Mohit Joshi, an Infosys veteran who takes over the reins in December from Gurnani, faces a tough task. Analysts have said that the company needs to fix execution, as it hasn't been able to deliver industry-leading revenue growth rates, and also hasn't been able to shore up its profit margins.