The decision by AT&T International Inc. to outsource some of its work to Tech Mahindra Ltd has resulted in more than just cost savings. The company had an option to pick up an 8% stake in Tech Mahindra for $34.5 million (Rs157.3 crore), provided it met certain specified milestones with respect to the amount of work outsourced.
The 8% stake is now worth nearly $200 million. AT&T’s decision to pick up the 8% stake in Tech Mahindra, therefore, is to take advantage of this increase in value. It doesn’t necessarily follow that AT&T’s engagement with the Indian information technology (IT) services firm will increase as a result of this ownership.
While business from clients such as AT&T is growing at a reasonably fast pace, this is being offset by a drop in business from the company’s largest client, BT Group Plc. The British telecom company accounts for around 46% of Tech Mahindra’s total revenue and was largely responsible for a 9% sequential drop in revenues last quarter. This is after adjusting for certain one-off restructuring fees the company received from BT.
According to a recent Citigroup report, “Tech Mahindra continues to face multiple challenges: (a) BT is unlikely to grow in the near term; (b) Satyam could face meaningful challenges on the supply side; (c) cross-currency and INR (Indian rupee), both pose challenges—given that the company has 56% of revenues coming from Europe (largely the UK).”
Graphic: Yogesh Kumar / Mint
So while the demand environment is positive for the IT services industry, Tech Mahindra is likely to tread a different path because of the above factors.
Almost all of the company’s revenue come from telecom, and the business environment for global telecom companies continues to be weak. While the purchase of Satyam Computer Services Ltd has helped the company diversify, its ability to capitalize on the positive demand environment seems to be limited.
It lost a number of senior managers last year, which some analysts feel is a precursor to client attrition.
Mahindra’s shares have underperformed its peers sharply since late January because of the markets’ discomfort about the company’s accounting policy. Instead of treating a restructuring fee from BT as a one-time income, the company is realizing the fee on a quarterly basis as part of its revenues.
Still, returns since the Satyam acquisition about a year ago are far higher than its peers, and some analysts feel that at current prices the stock is overvalued.