Tech Mahindra Q2 results: Net profit plunges 61.6% YoY to Rs 494 crore, revenue down 2%

Tech Mahindra's CEO and Managing Director CP Gurnani

IT services major Tech Mahindra reported a 61.6 percent fall in net profit to Rs 494 crore year-on-year for the quarter ended September 30, signalling a washout second quarter driven by slowing demand in telecom and communications segment and delays in deal cycles.

Communications, media and entertainment (CME) currently account for nearly 40 percent of the company’s revenue. CME business is down by 4.9 percent QoQ and 11.5 percent YoY.

YoY net profit was significantly below Moneycontrol’s estimates of a decline of 37 percent YoY touching Rs 822 crore. It also missed QoQ growth estimate of 18 percent.

Consolidated revenue for Q2FY24 declined 2 percent YoY at Rs 12,864 crore, missing Moneycontrol’s estimate of a marginal decline of 0.01 percent YoY coming at Rs 13,127 crore. On a QoQ basis revenue was down by 2.2 percent.

The company’s EBIT margin or operating margin came in at 4.7 percent, which is worse than the previous quarter’s 6.8 percent. This was a significant miss from Moneycontrol’s estimate of 8.9 percent.

The deal total contract value (TCV) stood at $640 million, up from $359 million in the last quarter.

CP Gurnani, Managing Director & Chief Executive Officer, Tech Mahindra, said, “The year is being characterized by a challenging demand environment and prolonged macro uncertainties calling for a very tactical approach. We have doubled down our strategy of working closely with clients, helping them to streamline and modernize operations as they reprioritize their resources.”

Rohit Anand, Chief Financial Officer, Tech Mahindra, added, “We have taken actions to reduce the exposure to non-core areas of business. These actions will, over time, help us improve our financial performance and enable long term sustainable growth. A consistent dividend payout reinforces our commitment towards creating value for our shareholders.”

Tech Mahindra’s board announced an interim dividend of Rs 12 per share for FY23-24.

Tech Mahindra now wants to diversify its revenue dependency from CME to other segments such as BFSI and healthcare. The CEO designate Mohit Joshi is currently reshuffling duties of the senior management to achieve the same, as competition from peers intensifies in a weaker demand environment.

This was Gurnani's last quarter as he is set to retire on December 19. Joshi is set to take over after December 19, following the retirement of Gurnani.

This comes at a time when Tier-I IT companies are already slashing revenue guidance for FY24 amidst macro headwinds, despite expecting a strong order book for the next two quarters.

Tech Mahindra closed at Rs 1,141.70 on BSE, down 13.45 percent from the previous day.

Worst two quarters

Speaking to the media, Gurnani said that the last two quarters were the most difficult ones he has seen, after being through quite a few cycles in his life and seeing several ups and downs.

"In terms of market timing, in terms of service offerings, I thought we were poised for riding some of the technology investments, particularly 5G and now I don't think the wave was strong enough for 5G at that moment, and somehow some of our customers had to stop the capital expenditure or reduced their capital expenditure because their operating costs became very high," he added.

Gurnani said that many of the customer corporations borrowed money and with rising interest costs, some of them faced a little more difficulty, then he had anticipated.

Joshi's restructuring plans

Joshi acknowledged while Q2 has been a challenging quarter, but  he remains very optimistic about the fundamental strength of the business and the long term opportunity that Tech Mahindra has. As he takes over, he has made some significant changes in the IT major's organisational structure, which will come into effect from January 1, 2024 onwards.

"Just a few words on the reorganisation... what we've done is consolidated down to six core strategic business units. We have cut the Americas business in to three business units. We have got Europe business where we have consolidated the telecom and non-telecom businesses into a single strategic unit and we have also consolidated our Asia Pacific and Japan business under a single leader, who will be based out of Australia. We have carved out India business into a separate business unit given the very unique nature of the market," he explained.

Joshi added, "From a delivery perspective, we have appointed Atul Soneja as the COO, who will be driving the consolidated IT services delivery, which historically was broken up into various market units. I think this consolidation gives us a wonderful opportunity to streamline, focus, drive resilience, service line innovation and the margin improvement that we are looking for."