The company that has recently saddled itself with the task of turning around Satyam Computer Services Ltd—Tech Mahindra Ltd—has reported that its own business has weakened.
The company caters to the telecom industry, which is going through a slowdown in the developed world. Industry leaders Tata Consultancy Services Ltd and Infosys Technologies Ltd had reported a drop in revenues from the telecom segment, and hence it’s not entirely surprising that Tech Mahindra’s results were weak.
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But the company’s revenues fell by as much as 8.8% sequentially in dollar terms, thanks to a sharp 16.8% drop in revenues from top client, BT Group Plc., previously known as British Telecom. This is on the back of an 18% drop in revenues in the preceding quarter.
In other words, the BT business has fallen by nearly one-third in the last two quarters. Of course, the depreciation in the British pound versus the dollar has affected revenues, but even volumes have been hit severely. The company management told analysts in a conference call that “it isn’t confident that the bottom has been reached as far as the core BT business goes”.
The company is set to start a large multi-year deal with BT called Andes in the April-June quarter, which will make up for a large chunk of the fall seen in the core BT business in the past few quarters. But this was already factored in by the markets. The new information in the March quarter results is that the core BT business is weaker than expected and that revenues from new projects such as Andes may also take a hit. News reports suggest that BT is set to report its worst quarterly performance, with even a huge write-down expected.
The non-BT business, meanwhile, rose marginally by 1.8% and now accounts for 48% of revenues. But things were grim on the profitability front. Earnings before interest and taxes fell by nearly 20% sequentially after excluding exceptional items.
The weak performance is worrisome as it comes close on the heels of the company’s acquisition of Satyam.
On the one hand, Tech Mahindra is faced with the mammoth task of transforming the fraud-hit company from its low-profit operations. On the other, it needs to manage the huge debt it has taken to fund the acquisition.
The main worry, according to analysts, is that the exodus of clients from Satyam may continue because of concerns that the company’s new owner specializes only in telecom. It’s no wonder Tech Mahindra’s shares have corrected after the initial excitement around the time of the buyout.
Graphics by Sandeep Bhatnagar / Mint
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