Tech Mahindra Q2 Results Highlights: Net profit comes at ₹505.3 crore, dividend declared

Tech Mahindra at its board meeting also approved the merger of its three subsidiaries - Perigord Premedia (India), Perigord Data Solutions (India) and Tech Mahindra Cerium - with itself. The merger is subject to requisite approvals.

"The Appointed Date of the Scheme would be 1st April, 2024 or such other date as may be directed or approved by the jurisdictional National Company Law Tribunal ("NCLT") or any other appropriate authority," the company said in a filing.

Along with its financial result, Tech Mahindra Limited announced an interim dividend of ₹12 per equity share of face value of ₹5 each on Wednesday.

The company has fixed Thursday, November 2 as the record date for determining the members entitled to receive the interim dividend. The interim dividend will be paid on Tuesday, November 21 to equity shareholders

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IT major Tech Mahindra reported a 61.1 per cent year-on-year (YoY) fall in Q2FY24 consolidated net profit at ₹505.3 crore. In the same quarter last year, the company's net profit was ₹1,299.2 crore.

Tech Mahindra Results Live: Ahead of the release of Q2FY24 results, the shares of Tech Mahindra was down by 1.27 percent at ₹1,140.50 apiece on the BSE at the closing bell. On the NSE, the stock was valued at ₹1,139.90 apiece at the closing bell, down 1.39 percent as against the previous day's close.

Tech Mahindra share price has fallen 12% in one month, while the stock is flat in the past three months. Tech Mahindra shares have gained over 12% year-to-date (YTD).

Tech Mahindra's total headcount stood at 148,297, at the end of the June quarter, down 4,103 quarter-on-quarter. The company has cash and cash equivalent at ₹7,701 crore as of June 30, 2023. The voluntary attrition during the quarter further fell to 13 per cent in the first quarter, compared to 15 per cent in the preceding January-March quarter of fiscal 2022-23 and 22 per cent in the year-ago period.

Tech Mahindra announced its April-June quarter results for fiscal 2023-24 (Q1FY24) on July 26, reporting a decline of 38 per cent in consolidated net profit at ₹692.5 crore, compared to ₹1,131 crore in the year-ago period. The fall in the company's profit was on the back of weakness reported in its key segments.

The IT major's consolidated revenue from operations during the first quarter of the current fiscal stood at ₹13,159 crore, reporting a rise of 3.5 per cent, compared to ₹12,707 crore in the year-ago period.

On the operating front, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) in the June quarter declined 28.8 per cent year-on-year to ₹1,338 crore from ₹1,880 crore in the corresponding quarter last year. Read here

Analysts said they wait to hear from Mohit Joshi, CEO designate, about his strategy as he has already spent ~4-5 months in the organisation now and is towards the end of the transition phase. Mohit will take over from CP Gurnani from 20th December 2023.

As per Motilal Oswal Financial Services’ estimates, Tech Mahindra is expected to report net profit of ₹900 crore in the quarter ended September 2023, lower by 5.5% in the previous quarter. The company’s USD revenue in Q2FY24 is expected to fall 1.1% QoQ to $1,582 million, while rupee revenue may decline 0.4% sequentially to ₹13,100 crore.

At the operational level, EBIT is expected to fall to ₹1,100 crore, while EBIT margin may contract to 8.7% from 8.8%, QoQ. Similar to Q1FY24, deal wins are expected to remain muted in Q2FY24.

For the IT sector, analysts expect Q2FY24 to be a continuation of the last quarter. Revenue growth is likely to be modest, dragged by lower discretionary tech spends and delay in execution of deals. However, demand stays solid—likely to show up in strong deal flows yet again— which should translate to a strong recovery in H2FY24. 

Overall, Indian IT services firms are expected to log modest growth in CC QoQ/YoY—in line with our/consensus expectations and on track to meet their respective full-year guidance. Margins are likely to remain flat (except for those giving out wage hikes). Outlook for FY24 is expected to be unchanged vis-à-vis the last quarter.

Tech Mahindra share price traded lower ahead of the release of September quarter results later today. Tech Mahindra shares gave up early gains and fell as much as 0.88% to an intraday low of ₹1,145.00 apiece on the BSE.

Here are key things to watch out for in Tech Mahindra Q2 results: 

(1) When should one expect demand recovery in the CME vertical? 

(2) What is going to be the strategy of TML under Mohit Joshi? 

(3) What does the company seek to achieve with the new management restructuring? 

(4) What will be the strategy on margins and what timelines have been set to achieve Tier-1 matching EBIT margins?

As per Kotak Institutional Equities’ estimates, Tech Mahindra is expected to report a net profit of ₹974.7 crore, registering a growth of 40.7% QoQ, while its revenue to remain flat at ₹13,207.7 crore in Q2FY24. EBIT is expected to rise to ₹1,156.4 crore, while EBIT margin is likely to improve by 199 bps sequentially to 12.2%.

Deal wins will remain muted due to weak macro and slow decision-making. We forecast net new TCV of $400-500 million, it said.

Brokerage InCred Equities believes that Tech Mahindra’s revenue will be impacted by slowdown in the corporate and telecom sectors. Telecom vertical is probably levelling off. Reduced revenue, senior employees' residual compensation increases, and possibly one-time contingencies that affect EBIT margins. EBIT's sequential fall will affect PAT.

Axis Securities anticipates that the company will report a 0.1% QoQ decline in revenue, with margins likely to hold steady during the quarter. Key monitorables to watch out are -

a) Deal TCVs and pipeline from the communication vertical

b) Pricing situation

c) Attrition

d) Growth/margins/DSO day outlook

e) 5G rollout commentary

The growth of the IT services industry is expected to remain weak in 2QFY24, as macroeconomic uncertainty continues to weigh on discretionary spending. While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth, even though Q2 is traditionally a robust season for the sector.

Revenue is expected to decline further following the dip in 1QFY24 as the CME continues to remain under pressure. Expect 1.1% QoQ CC decline in revenues for 2QFY24.  Similar to 1QFY24, deal wins are expected to remain muted in 2QFY24. Hiring is expected to remain muted. Margins to see large one-offs. Adjusted margins should remain stable. The outlook on margin and growth in the CME vertical will be the key monitorable, Motilal Oswal Financial Services said.

Tech Mahindra is expected to report a revenue decline of 0.3% sequentially due to continued weakness in the communication vertical. EBIT margin is expected to recover sequentially by ~210 bps, following the sharp decline in Q1FY2024, as per Sharekhan estimates.

EBIT margin is expected to expand to 9.3% in Q2FY24; Tech Mahindra recorded its lowest ever EBIT margin of 6.8% in 1QFY24 due to compensation increases and one-time provision due to a customer bankruptcy. Tailwinds would include sub-con, which is still higher than peers at ~14% of revenue, divestment of the non-strategic portfolio and investing in juniors to manage resources more efficiently, Nirmal Bang said.

Brokerage house Nirmal Bang expects Tech Mahindra to deliver (-) 1% CC QoQ growth, which will be impacted by weakness in the CME vertical (~40% of sales, which declined by ~9% both QoQ and YoY in 1QFY24). Cross-currency headwind will be ~90 bps. In Q2FY24, we expect TCV to be lower than the guided range of $700 million-1,000 million range after two consecutive quarters of misses.

Pune-based IT major, Tech Mahindra Ltd, will report its Q2 results on Wednesday, October 25. So far major Indian IT companies, such as TCS, Infosys, HCL Tech, and Wipro, have announced muted earnings for the July–September quarter (Q2) on the backdrop of ongoing macroeconomic worries. Most of the brokerages expect a soft Q2 for Tech Mahindra with a sequentially drop in revenue and margins. Read full report here

Expect investor focus on — 

(1) turnaround strategy and implications of recently announced organization structure that will be effective January 2024

(2) timing of divestments of low-margin business that will aid margins but adversely impact revenue growth

(3) outlook for margins in FY2024 noting current level of margins are materially lower than normalized levels and levers that can be flexed to improve margins

(4) margin normalization timelines and aspirational growth and margin levels

(5) outlook for vulnerable segments such as XDS, ERD and network services, which have higher exposure to discretionary spending

(6) health of deal pipeline and positioning in cost take-out deals

(7) any revenue leakage in existing accounts and positioning in vendor consolidation events

(8) outlook for revenue growth in top telecom clients

(9) requests for furloughs in retail vertical and BPO services

We expect revenues to remain flat on a QoQ basis in CC terms with weak performance across communications and enterprise segments. Q1FY24 EBIT margin was impacted by 200 bps due to unanticipated bankruptcy of a client. We forecast a stable adjusted EBIT margin at 8.8%. The company may have one-time costs in the quarter, which is difficult to quantify. Hence, we do not bake the same in our estimates, Kotak Institutional Equities said. 

Deal wins will remain muted due to weak macro and slow decision-making. We forecast net new TCV of $400-500 million. We expect quarterly financials to have limited sway in the near term with focus on turnaround under Mohit Joshi. The recently announced organization structure can lead to a few exits at the leadership levels, it added.

According to Nuvama Institutional Equities’ estimates, Tech Mahindra’s Q2FY24 net profit may fall 3.7% to ₹666.9 crore from ₹692.48 crore, QoQ. The company’s USD revenue may fall 0.9% to $1,587 million from $1,601 million, while revenue in rupee terms may decline 0.3% sequentially to ₹13,119.6 crore.

EBIT in the September quarter is expected to fall 15.9% to ₹749.8 crore from ₹891.4 crore in the June quarter, while EBIT margin is likely to compress by 106 bps to 5.7% from 6.8%, QoQ, on the back of various business restructuring actions.

Tech Mahindra is expected to report 0.7% QoQ decline in CC revenue and 0.9% decline in USD revenue - driven by weakness in Telecom segment and weak deal flow in earlier quarters. Margins are likely to decline further by 100 bps QoQ on the back of various business restructuring actions. Deal wins are anticipated to be weak YoY as is the overall outlook, said Nuvama Institutional Equities.

So far major Indian IT companies, such as TCS, Infosys, HCL Tech, and Wipro, have announced muted earnings for the July–September quarter (Q2) on the backdrop of ongoing macroeconomic worries. Although the second quarter is usually a strong one for this sector, Q2FY24 was expected by the street to be sluggish since discretionary expenditure has been hindered amid macroeconomic uncertainties.

“While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth,” said brokerage Motilal Oswal Financial Services in its report.

Approximately 45 companies will release their September quarter results today. Investors are focused on major players like Tech Mahindra Ltd, Axis Bank Ltd, Jubilant Foodworks Ltd, Welspun India Ltd, Network18 Media & Investments Ltd, and Indus Towers Ltd. Read full report here

Tech Mahindra share price opened higher ahead of the release of Q2 results today. Tech Mahindra shares opened marginally higher at ₹1,158.00 apiece as against its previous close of ₹1,155.15 apiece on the BSE. The stock price rose 0.88% to ₹1,165.40 apiece.

Tech Mahindra’s board of directors today will also consider a recommendation for the interim dividend payment for the fiscal year 2023–2024. The record date to determine the members eligible to receive the interim dividend, if approved by the board, is set by the company for Thursday, November 2.

Pune-based IT major, Tech Mahindra Ltd, will report its Q2 results today, October 25. For the fiscal year 2023–2024, the board of directors will also consider a recommendation for the interim dividend payment. The record date to determine the members eligible to receive the interim dividend, if approved by the board, is set by the company for Thursday, November 2.