Tech Mahindra’s growth in constant currency dropped about 6.3% sequentially in the first-quarter of FY21
The company's enterprise vertical showed resilience during the quarter as the fall in revenues was lower than analysts’ expectations
The pandemic is hitting deliveries of the IT firms, and Tech Mahindra’s Q1 show is no exception. The mid-tier IT firm’s revenues declined nearly 7% year-on-year during the June quarter. Further, deal wins have also been lower than the normal run rate, but it has not deterred investors as the stock jumped up about 3% on Tuesday.
In fact, Tech Mahindra’s growth in constant currency dropped about 6.3% sequentially in the first-quarter. Nevertheless, its enterprise vertical showed resilience during the quarter as the fall in revenues was lower than analysts’ expectations.
In its communications vertical, the decline in revenues was on expected lines at about 8.2% q-o-q in constant currency. Some of Tech Mahindra’s clients deferred projects due to covid-19, which also impacted revenue growth.
In addition, supply side challenges have been another hindrance. However, the management noted that much of the supply side issues are behind, and is looking at ramping up operations in the coming quarters.
One factor that enthused the Street is its margin. Tech Mahindra’s Q1 margins showed resilience largely due to the fact that selling and administrative costs were under control. In fact, the Ebitda margin increased 16 basis points q-o-q to 14.3%.
Lower order book is a worry, though, and is an overhang on the stock. Tech Mahindra’s order book declined by about 43% q-o-q due to delays in closure of some enterprise deals. This was one of the weakest quarters in terms of order win deals. The firm clocked deal wins of $290 million in Q1.
The management said that supply-side pressures are easing. In the coming quarters, Tech Mahindra is expected to show better growth rates in both its communications and enterprise verticals. Further, pricing and collections are expected to remain stable, while executions have already started improving lately.
“Among the harder-hit segments, Tech Mahindra expects a faster recovery in the BPO business and a gradual recovery in the Network Services business. The company suggested that the pipeline on the US Enterprise business side was the strongest in over three years," said analysts at Emkay Global Financial Services in a client note.
But even as most IT stocks recovered considerable ground and trade above pre-covid-19 highs, Tech Mahindra's stock is still about 19% below its February highs. Nevertheless, some of the IT sector’s resilience could rub off on the stock. “We believe the sector re-rating is likely to sustain given the phenomenal resilience and adaptability demonstrated during the quarter," said Motilal Oswal Financial Services in a client note.
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