Tech Mahindra Ltd’s shares had underperformed the market after its revenue growth fell sharply in the March quarter. Profit margins narrowed at a higher-than-expected pace as well, raising concerns about its earnings. The June quarter results, released after market hours on Tuesday, provide no major reason to alter the stock’s trajectory.
Dollar revenues grew just 1.9% year-on-year; and fell 1.6% compared to the March quarter. “In the current quarter, the company faces seasonality, however, even after factoring the seasonality, Tech Mahindra’s revenues were below our expectation," ICICI Direct Research said in a note.
Worse still, the fall in profitability was far higher than Street expectations. Ebit (earnings before interest and tax) margins contracted 1.5 percentage points from a year ago.
As a consequence, operating earnings (Ebit) in dollar terms dropped 9% from a year ago. Sequentially, they are down as much as 26%. “Margins are way below estimates leaving room for earnings-per-share cuts," an analyst said in a note to his clients.
The performance is weak across key business verticals. Revenues in the communications division, the largest business vertical, were down 3.2%, sequentially. Revenues at manufacturing, banking and financial services, and retail also lagged. Contribution from the top 10 clients, who together generate more than 30% of Tech Mahindra’s revenues, has seen a notable fall sequentially. And, as if all this wasn’t bad enough, employee attrition remained elevated at 21%.
However, digital business continues to see positive momentum. Tech Mahindra acquired a US-based company at an enterprise value of $25 million to enhance its capabilities in digital transformation offerings.
Further, deal wins remain healthy with the company signing contracts worth nearly half a billion dollars, on the back of deal wins worth $408 million in the March quarter. “We remain optimistic on the demand environment, evident from a very strong pipeline and deal conversions. Digital will continue to be a primary growth driver," C.P. Gurnani, managing director and chief executive officer, said in a statement.
But the slow transformation of the deal wins into revenues and earnings may keep Tech Mahindra investors on the sidelines, even though valuations are less than 12 times estimated FY21 earnings.