Tech Mahindra tanks 7% on Q1FY16 revenue, margin warning

However, it feels, favourable currency movements could help both revenue and margins. It said the deal pipeline remains healthy and investments in digital technologies, research & development, growth factories will continue in an accelerated mode.

It added that organisation wise, there is renewed focus on improving operational levers and cost control parameters, however the impact is expected to be visible only from Q3FY16 onwards.

However, Sarabjit Kour Nangra, VP Research - IT at Angel Broking has maintained its buy rating on the stock with a price target of Rs 646.

Nangra has also maintained numbers and target for FY2017, though FY2016 could be tweaked. "Also after factoring in marginal improvement in the margins in FY2017, the stock is attractively valued. We have reduced the FY2016 sales and net profit numbers by 5 percent and 6 percent respectively," he said.

Tech Mahindra also disappointed in the quarter ended March 2015. It had missed street forecast with the fourth quarter consolidated profit falling 39.2 percent sequentially to Rs 472 crore, dented by lower margin and higher forex loss. "Q4 results were impacted by macroeconomic factors like cross currency headwinds and salary increases," said Vineet Nayyar, Executive Vice Chairman, Tech Mahindra on May 27.

Rupee revenue grew by 6.3 percent to Rs 6,116.8 crore during January-March quarter compared to Rs 5,751.7 crore in December quarter while dollar revenue climbed 6.5 percent Q-o-Q to USD 984.1 million (which was also below estimates of USD 996 million).

At 11:59 hours IST, the scrip of Tech Mahindra was quoting at Rs 487.65, down Rs 34.25, or 6.56 percent after hitting a 52-week low of Rs 486.80 on the Bombay Stock Exchange.

In an exclusive interview to CNBC-TV18, Tech Mahindra's managing director and chief executive officer, Vineet Nayyar, says the company's deal pipeline is healthy and margins will improve Q3 onwards .

Posted by Sunil Shankar Matkar

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Below is the verbatim transcript of Vineet Nayyar’s interview with CNBC-TV18\\'s Anuj Singhal and Reema Tendulkar

Reema: Based on your last commentary we got the sense that this quarter too will be subdued. So, the street was working with a growth of say about one percent roughly. Now you are talking about a decline in your top line. So what is the reason for that? What has changed between last quarter to this?

A: A movement of one percent this way or that way is very difficult to predict but when we can predict we chose to disclose it to the market. One percent is normally is seen as part of an acceptable error.

Anuj: So, what could be the extent of revenue and margin decline this quarter?

A: At this point of time we cannot indicate in quantitative, for that you will have to wait for the results. All what we have said is that there is a possibility of decline and that is why in complete transparency we decided to disclose it to the market.

Reema: What will be the total hit on account of your H1B visa costs. In your earlier interaction you told us that in Q1 there will be a 100 bps impact on your margins because of H1B visa. Will it be more than that?

A: It is about the same. Our cost varies somewhere between USD 9 million to 12 million. It is a onetime cost for the year in the first quarter.

Reema: You have spoken about how margins are likely to improve from Q3 of FY16. What gives you the confidence that margins will improve and what are the key levers?

A: Because we have the contracts and what gives me the confidence is ten years of returns which you folks considered outstanding. Reema: So then what will be the quantum of margin improvement from here on and have we seen the bottom in terms of a margin decline by Q2 of FY16?

A: I am hoping that we would have seen the bottom of the margins by Q2.

Reema: You have also indicated that improving the margins of your acquired companies like LCC and SOFGEN will be the key priorities of the company. Now LCC margins were at 2.5 percent in Q4. What is the margin improvement trajectory expected at LCC?

A: Our strategy has been to pick up assets which are of great strategic value but by our standards are underperforming. This gives you very good valuation. Now when we acquired LCC and for that matter SOFGEN we believed that it was underperforming in terms of profitability and that is the turnaround we bring about in all the acquisitions we have done starting with Satyam and obviously for a period of time, six month or a year and half, its margins will depress the overall margins but then it will bounce back and net-net the advantage is always to the shareholder because the assets have been purchased at a very low price.

Reema: So, in how many more quarters will LCC margins go back to its historical average of eight percent and thereafter double digits?

A: We don't give forward guidance but these are not seen by us as unreasonable objectives.

Reema: Utilisation you spoken is a margin lever. In Q4 it was as low as 71 percent. By how much can it improve and what is the targeted utilisation band?

A: All I can tell you is that the street is two quarters in aberration and we are back in business in full strength from quarter three.

Reema: The company has not closed a deal in the telecom vertical for the last few quarters. When can we expect you to start declaring the closure of deals at this particular verticals because that move gave the street some confidence?

A: We will inform it as soon as it has been done. There are large number of deals in the pipeline and you will certainly hear about them.

Reema: Can it happen in the first half of FY16 or anything scheduled for the second half of this fiscal year?

A: I wish I had the capability to predict but it isn't over till it is over as you know. So, only when you close it then does this stop.