Tech Mahindra Ltd reported a 0.9% sequential rise in dollar revenue in the April-June period, which beat analysts’ estimates but was nonetheless the slowest start by India’s fifth largest software services exporter.
Tech Mahindra, part of the $17.8 billion Mahindra Group, saw its revenue in dollar terms inch up to $1.03 billion, while net profit declined 12.8% from the preceding quarter to $111.5 million in the three-month period ended June. In rupee terms, the company’s revenue increased 0.54% from the preceding quarter to Rs.6,921 crore even as net profit declined 12.6% to Rs.750 crore.
A Bloomberg survey of 33 analysts had estimated Tech Mahindra to report a revenue of $1.03 billion, or Rs.6,900.2 crore, in the quarter. Analysts had been expecting a net profit of $110.12 million or Rs.735.90 crore.
The company’s profitability tanked on account of a 2.5% sequential rise in expenses, which led to a fall in earnings before interest, tax, depreciation and amortization (Ebitda). Tech Mahindra’s Ebitda narrowed to 14.9% from 16.7% at the end of the March quarter.
Tech Mahindra’s muted show pales in comparison to an already slow start made by four home-grown technology firms, underscoring the challenges ahead of India’s $150 billion outsourcing sector.
Tata Consultancy Services Ltd, with $4.36 billion in revenue in the April-June period, which is more than the Tech Mahindra’s full-year revenue of $4.04 billion, reported a 3.7% sequential dollar revenue growth, while Infosys Ltd and Wipro Ltd reported 2.2% and 2.6% growth, respectively. Bengaluru-based Mindtree reported a 2% increase in revenue.
HCL Technologies, the country’s fourth largest software firm, is expected to report first-quarter earnings on 3 August.
At the heart of Indian IT firms’ underperformance is the way the outsourcing sector is gradually changing from a labour-heavy model to one which requires technology vendors to embrace newer technologies, including artificial intelligence and automation-powered platforms and cloud computing.
Despite local technology companies’ claims of making investments in cloud computing and mobility platforms and also reskilling their workforce, the earnings performances reflect the fact that most are struggling to record higher growth.
“At the sector level, slowing growth is being accompanied by rising margin headwinds, stemming from the commoditization of services, softer demand and hectic merger and acquisition activity. All this has translated into downward earnings pressure and, through FY16, downgrades have outnumbered upgrades,” Rumit Dugar and Saumya Shrivastava, analysts at Religare, the brokerage, wrote in an industry note dated 5 May. “We expect these forces to prevail through FY17, keeping earnings at risk.”
Still, the management of Tech Mahindra put up a brave face, calling it a “good quarter”.
“I’m happy with our performance as the first two quarters are weak for us which we cover up in the second half of the year,” said C.P. Gurnani, managing director and chief executive of Tech Mahindra.
“Our communication business has had a few challenges. We strongly believe that the good results that we have had is because of our focus on digital,” said Gurnani, adding that the digital segment (which includes analytics and cloud computing, among other newer technology areas) now accounts for about 22% of revenue.
Tech Mahindra does not give a forecast for the year but Gurnani said the “good news is our traditional core business in communication is showing healthy growth”.
However, Gurnani said the management expects “healthy” business from clients in the telecoms space, and for this reason expects improved business from two of its largest geographies—US and Europe—in the coming months.
Tech Mahindra managed to beat Street expectations thanks to a 5.2% sequential improvement in business from clients in the US, which accounts for 49% of revenue.
However, Europe, which accounts for 28.3% of business, did not report any growth, while rest of the world, which accounts for 22.8% of business, saw a 7.2% decline.
One heartening feature in Tech Mahindra’s results was that after five quarters, the company reported higher business from its largest clients, suggesting the company is again getting more business from its largest customers. Its share of business from its top 20 clients now account for 52.6% of its revenue, as against 51.9% at the end of March quarter.
The company added eleven clients in the June quarter, as against six clients in the preceding quarter, to take the total number of active clients to 818.
The firm had 107,216 employees at the end of June, up from 105,432 at the end of March.