BackTech Mahindra’s outperformance should continue
Tech Mahindra is reaping the benefit of large deal wins in previous quarters, which are now translating into revenue
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Tech Mahindra Ltd’s shares have outperformed the CNX IT index by about 18% in the past six months. With the company beating estimates for the second straight quarter, and that too by a handsome margin, the outperformance should continue. The company’s revenue rose by 4.4% to $791 million sequentially, higher than even the most optimistic estimates. Besides, note that industry leader Tata Consultancy Services Ltd (TCS) managed growth of only 3% last quarter.
Tech Mahindra is reaping the benefit of large deal wins in previous quarters, which are now translating into revenue. What’s more, deal wins have continued—last quarter the company signed deals which will result in incremental revenues of $220 million, the management said on a conference call with analysts. According to analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd, in the preceding five quarters till September 2013, Tech Mahindra is estimated to have won deals worth more than $950 million. These large deals are typically executed over a five-year period, which means that the deals won in the past six quarters can result in quarterly revenues of $58 million. For perspective, last quarter’s fairly impressive growth involved incremental revenues of $33 million.
The company said on the call that growth in 2014 is expected to be higher than the previous year on the back of a recovery in the US and Europe, and with clients saying they are looking to spend more on technology this year.
Investors will also be pleased that growth isn’t coming at the expense of margins either. Operating margin was flat thanks to a rationalization in selling and general expenses. Margins might decline in the March quarter owing to wage hikes, but some of this is expected to be mitigated by factors such as increasing employee utilization.
Some analysts had factored in a decline in margins in the December quarter as well. The fact that the company beat estimates both on the revenue and margin front means that reported operating profit was much higher than estimates. Analysts at Bank of America Merrill Lynch had estimated operating profit of ₹ 1,096 crore, while the company reported a profit of ₹ 1,136 crore.
Needless to say, the stock can be expected to rally when markets open on Wednesday. At current levels, valuations don’t look too demanding at 13.5 times estimated financial year 2013-14 earnings.
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