Tech Mahindra is still bumping along the bottom
Tech Mahindra Ltd shares rose 4% in a relief rally on Tuesday, after the company reported better-than-expected results. But it’s important to note that expectations were running extremely low after the company’s shocking March quarter results, when margins fell to unheard of single-digit levels.
Earnings before interest and tax (Ebit) margins improved by 120 basis points sequentially, but remained in single-digits.
While part of the improvement in margins last quarter was thanks to job cuts, part of it was driven by a reversal of one-time restructuring costs.
Also, with the impact of wage hikes yet to be seen, returning to last year’s average margin of 11% looks like an uphill task.
Revenue growth, or rather the lack of it, continues to be a concern. Organic revenue growth was the lowest in the last eight quarters. Revenues fell 0.6% in constant currency terms and the key telecom segment, which accounts for 45% of revenues, continued to struggle.
“Tech Mahindra is underperforming peers materially on telecom growth driven by LCC depression, weaker proposition to tap convergence demand and possible market share losses, in our view,” analysts at Nomura Research said in a note to clients.
Lightbridge Communications Corp. (LCC) is a $240 million acquisition the company made in 2014.
One of the main reasons the stock reacted positively was the fact that Tech Mahindra’s valuations had fallen to relatively low levels. Ahead of the results, the company’s shares had underperformed the Nifty IT index by around 24% year-till-date. But as Nomura’s analysts point out, “Given Tech Mahindra’s low return ratios, a material improvement required to reach FY17 Ebit margin levels of 11% (vs 9.4% in 1Q) in light of slow growth and client concentration risks, there could be a cap on valuation multiples.”