After languishing for years, shares of Tech Mahindra Ltd have nearly doubled from their lows touched in mid-2017. The rebound is largely to do with a recovery in the company’s margins. Operating profit margin has widened from merely 9% in the June 2017 quarter to 16% currently.
In the December 2018 quarter, operating margin improved 80 basis points sequentially, and 340 basis points from a year ago. Analysts were expecting an improvement, albeit at a much slower pace, as they assumed recent large deal wins involved lower margins.
What’s more, Tech Mahindra’s constant currency revenue grew 4.3% on a sequential basis, against estimates of about 2.7% increase. Deal wins remained strong, although they fell marginally compared with the second quarter.
The digital business, which drove business growth, has better realizations and margins. Further, cost-rationalization measures such as automation helped improve profitability.
On the negative side, attrition continues to increase. From 17% in the year-ago quarter, attrition rose to 21% in December 2018. The worry about high attrition levels is that it comes in the backdrop of high utilization levels, which reached 83% last quarter. Both factors together may drive up employee costs, said some analysts.
Heading into FY20, investors will be keen to know if the much-awaited spending in next-generation telecom technology (5G) materializes. That will not only result in sustained growth momentum but also help the Tech Mahindra stock reduce the valuation gap with its larger peers.