One company’s poison is another company’s meat. Faced with intense competition, the challenge of new technologies, and the saturation of mature telecom markets in developed economies, telecom service providers have no alternative to offshoring in order to cut costs. Tech Mahindra, the largest offshore vendor in telecom, is in a unique position to capitalize on that opportunity.
The company’s March quarter results, with a 14% rise in revenues and 18% growth in profit before exceptional items compared to the December quarter, bear out the strength of the trend.
Tech Mahindra’s close association with BT, which accounted for 67% of revenues in the March quarter, has paid rich dividends and it recently signed a $1 billion (Rs4,500 crore then) five-year deal with BT Global Services. The upfront discount of Rs525 crore on that deal led to a reported net loss of Rs329 crore for the quarter, after accounting for the one-off exceptional charge. The benefits are expected to start flowing in from the third quarter of the current year.
The flip side of the BT link is that Tech Mahindra’s client concentration is too high. In the March quarter, the proportion of revenues from BT actually increased.
Apart from the $1 billion deal under its belt, revenues from non-BT business have also increased by 7% compared with the previous quarter, a decent rate of growth. Even more encouraging are the employee additions, with 1,654 new software professionals, which gives an indication of the pipeline of new business.
The risks: a high attrition rate, salary increases and, of course, rupee appreciation, which is a threat in spite of the bulk of Tech Mahindra’s earnings coming from the UK. Unfortunately for investors, the market is fully aware of the firm’s potential, which is why the stock has gone up almost three times since its listing last August.
Dabur India’s revenue growth has been 20% in the March quarter, with the main consumer care business growing at a similar rate. While Dabur’s foods business has shown rapid growth, the consumer health business has been a laggard, with revenues almost flat.
Also, profit from the foods segment has been lower than in the same quarter of last year, while year-on-year profit growth has been a mere 4% for the consumer health division. The result: the consumer care business, which accounts for 79% of the company’s revenues, accounted for 86% of the profit before expenses unallocable to specific divisions, interest and tax. Operating margins for the company as a whole fell about a percentage point, compared to the March quarter of last year, as higher raw material and advertising costs took their toll. Both raw material cost and advertising cost as a percentage of sales have gone up by around two percentage points year-on-year. Higher “other income” and a lower tax outgo helped boost the bottomline, which was up 23% , net of exceptional items.
The management points out, however, that Dabur is the fastest-growing player in the shampoo and oral care categories. Price hikes in March should boost margins in the next quarter. The management is confident about volume growth going forward and expects better margins in the foods business as a result of higher value-added products.
The stock is more expensive than Hindustan Lever on the premise that its foods and international businesses will be new growth drivers. But at around 24 times estimated 2008 earnings, that’s already factored into Dabur’s stock price.