Tech Mahindra profit dips on staff, R&D costs

Tech Mahindra Ltd on Tuesday posted a 4.1% drop in quarterly net profit hit by expenses on new hires and investments in research and development (R&D) projects.

Profit in the three months ended 30 September fell to ₹1,285.4 crore from ₹1,340.9 crore in the previous year. Rupee revenue rose 21% to ₹13,129.5 crore from ₹10,881.3 crore during the period. Dollar revenue grew 11% to $1.63 billion from $1.47 billion. The software services firm reported an attrition rate of 20% in the quarter, which was noticeably lower than its peers in the Indian IT sector that’s grappling with attrition rates of 21-25%.

A 27% jump in expenses hit Tech Mahindra’s net profit in the quarter. This led to an 11% fall in Ebit (earnings before interest and taxes) to ₹1,468 crore. Ebit margin too, fell 3.8 percentage points to 11.4% in the quarter.

CP Gurnani, managing director and chief executive, Tech Mahindra, said at a post-earnings conference call that there are slowdown markers in the global market. “For instance, large appliance vendors in Europe have seen a slowdown in net sales over the past two months due to slowing consumer spending. Factors like these will hit some deals in the coming quarters, but for now, the deal pipeline remains strong,” he said.

Tech Mahindra signed $716 million worth of net new deals in the quarter, lower than $750 million a year earlier.

The company added four new clients in the $10 million-plus category and three in $20 million-plus, but failed to sign any $50 million-plus deal during the September quarter.

North America contributed the bulk of total revenue, with a share of 50.8%, followed by Europe at 24.5%, and the rest of the world at 24.7%.

In an interview, Gurnani said while India contributes about 5% of revenues, local demand from the advent of 5G services, digital transformation and government projects remain robust at present.

He said Tech Mahindra has stepped up its advanced technology project offerings, and expects projects such as enterprise metaverse deployments to play a significant role in its order book, going forward.

The core ‘technology’ vertical was Tech Mahindra’s fastest growing segment — rising 25.5% from a year earlier in the September quarter to account for 10% of its overall revenue, up from 9% last year.

Explaining the high employee expenses in the quarter, Rohit Anand, chief financial officer, said it was due to a high volume of fresher hiring, “coupled with strategic investments in R&D initiatives.”

“We expect these moves to generate strong cash flows in the quarters to come. This was a conscious, strategic decision,” he said.

Among verticals, communications, media and entertainment (CME) led industry-wise revenue with a 40% contribution, followed by manufacturing (16%) and technology (10%).

Shares of Tech Mahindra closed 0.77% higher at ₹1,071.65 apiece on Tuesday on the BSE. The stock has fallen 37% since January.

Analysts pointed at a neutral picture based on Tech Mahindra’s quarterly earnings.

Omkar Tanksale, senior research analyst at Axis Securities, said the company’s performance was more or less in line with market expectations.

“We expected a 3.6% sequential revenue growth, as against Tech Mahindra’s 3.3% reported growth. The quarterly performance is largely in line with expectations, where the company looks to be poised positively in the long run, but may face a neutral run in the immediate future,” Tanksale said.

Despite the neutral outlook, Tech Mahindra’s dividend announcement of ₹18 per share could be deemed as a move to transfer additional cash flows towards its shareholders — which is typical for an IT sector firm, experts said. “What’s important is to see if the company is projecting growth, which the firm is doing at the moment,” Tanksale added.

Akshara Bassi, research analyst for global cloud and servers market at Counterpoint India, added that the numbers showcased how the macroeconomic cross-industry headwinds have started factoring in. “The profitability margins have also taken a hit. Companies are gradually becoming more cautious, so we could see a couple of muted quarters going forward,” she said.

Bassi also added that Tech Mahindra’s high employee expenses, coupled with lower than average attrition during this quarter, may mean that the company’s hiring volume may drop in the coming quarter.