Tech Mahindra Q3 Preview: To deliver muted growth amid weak seasonality, high base

Tech Mahindra will release its Q3 numbers on January 17.

Information technology major Tech Mahindra is set to release its October-December numbers on January 17. Analysts are forecasting a sequential fall in net profit on the back of a high base of the last quarter and muted revenue growth due to weak seasonality for select segments.

According to a Moneycontrol poll of nine brokerages, Tech Mahindra is expected to post a 0.3 percent increase in revenue to Rs 13,355 crore, up from Rs 13,313 crore recorded in the previous quarter.

Analysts also estimate consolidated net profit for Tech Mahindra to decline 16 percent on-quarter to Rs 1,051 crore. It is worth noting that the IT major had recorded a net profit of Rs 1,250 crore in the preceding quarter, aided by the sale of a property for Rs 450.2 crore.

On the other hand, EBIT margin is likely to expand 40 basis points on quarter to 10 percent as per the estimates. Among the brokerages polled, Kotak Institutional Equities sees the lowest fall in net profit at nearly 10 percent while BOBCAPS foresees the sharpest fall at nearly 23 percent.

What factors are driving the earnings?

The positive seasonality for the telecom business is likely to offset higher furloughs in the quarter gone by, lifting revenue marginally. However, margins are expected to benefit from deferred wage hikes and cost efficiencies measures.

Seasonality effect: Brokerage firm PL Capital believes that Tech Mahindra's Q3 revenue performance will be impacted by furloughs and weakness in the manufacturing segment which will mitigated partially by positive seasonality in Comviva business.

Margin improvement: Margins are likely to deliver sequential growth due to benefits of the company's cost optimisation program, Project Fortius and delay of wage hikes. Kotak Institutional Equities noted that the margin expansion could have been higher but for currency headwinds capped the growth.

Deal wins: Most brokerages anticipate deal wins for Tech Mahindra to be higher in Q3 as compared to Q2. KIE forecasts net new deal wins of $700 million, which is a sequential improvement and a material increase on-year. More importantly, the brokerage highlighted that new deals are won at a higher margin in Q3.

What to look out for in the quarterly show?

Looking ahead, brokerage firm Nomura believes commentary on demand and banking and
telecom verticals, large deal wins and progress on margin expansion and revenue growth trajectory targets for FY27 will be on investors' radar.

Aside from that, the management's commentary over the trajectory of discretionary demand will also remain in focus.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.