TechM shares surge to over 6-year high: All you need to know

Shares of Tech Mahindra, India’s fifth largest IT major,rose more than 5 percent on Friday to its highest since May 2007 after the company’s July-September earnings beat some analysts’ estimates.

Mahindra & Mahindra’s information technology armon Thursday said it posted a consolidated net profit of Rs 718 crore, slightly higher than consensus forecasts of Rs 710 crore, during the quarter.

The stock was up 5.4 percent at 9:28 a.m, outperforming a 0.14 percent fall in the Nifty.

The stock also saw strong volumes in early trade. This was the highest the stock has touched since May 2007.

All you need to know about the results:

1. Tech Mahindra’s 57.6 percent increase in its net profit was on the back of growth across geographies and verticals. The firm’s net profit stood at Rs 718 crore during the quarter under review, against Rs 456 crore in the same period last year.

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2.Consolidated revenue, which was announced after market hours, jumped 16.3 percent on quarter (up 35.4 percent on year) to Rs 4,771 crore in the three-month period ended September 2013, which was higher compared with its peers.

3.The growth was broad-based with a majority of verticals and geographies reporting moderate-to-robust growth. However, Europe led the growth. Business from Europe grew 6.8 percent and that from the US and rest of the world 1.5 percent.The company is quite optimistic on Australia and Africa where it iswitnessing increased traction.

“We are seeing a resurgence in Europe on the back of an economy rejig towards identifying and selecting more cost-effective solutions - where India becomes a direct beneficiary,“ chairman Vineet Nayyar said .

“The winning trio for us this quarter - growth across verticals, regions and practices - reflects Tech Mahindra ’s new found energy and alignment to win large deals, as well as participate with customers in their transformation journey,” said C P Gurnani, managing director and CEO.

4.EBIT margins improved to 20.7%, ahead of expectations.Its sequential dollar revenue growth of 4.7 percent (17.6 percent Y-o-Y) was better compared with peers Infosys (3.8 percent), HCL Technologies (3.5 percent) and Wipro (2.7 percent), but lower than TCS (5.4 percent).

The company won 13 deals during the quarter with an aggregate TCV of $500 million, with two large deals in excess of $50 million.

“Management indicated that the company is witnessing pick up in discretionary spending and a strong deal pipeline in IMS, where Tech Mahindra is actively gaining market share through renewal deal wins,” Angel Broking said in a report. The brokerage firm continue to remain positive on Tech Mahindra.

5. TechM’s employee costs as percent of revenues came down from 53.7 percent in the first quarter to 51.1 percent in the second quarter.It added 2,172 employees during the quarter and has a total of 85,234 employees as on September 30.

Software services headcount grew 3.9 percent QoQ to 55,432 on top of 2.3 percent QoQ growth in Q1FY1.

“Such healthy headcount addition coupled with strong deal wins and improvement in win rates shows good revenue visibility,” said ICICI Securities.

6. At the end of Q2 TechM had more than halved its consolidated debt to Rs 335 crore from Rs 1,159.6 crore in March 2013 . According to a report in The Economic Times _,_ the integration of Satyam’s relatively more diversified services portfolio with its telecom-dominated business has kept the cash register ringing for Tech Mahindra.

7.Tech Mahindra reported consolidated forex loss of Rs 26 crore during second quarter as against gain of Rs 134 crore in first quarter. Other income dropped significantly to Rs 38 crore from Rs 207 crore on quarter, which included forex loss of Rs 26 crore.

8. Tax rate, however, increased to 28.3 percent, up from25 percent in Q1FY14 due to process integration with Mahindra Satyam. TechM clarified that this tax increase in a one-off event.

9.The attrition rate was higher at 16 percent during second quarter as against 15 percent in previous quarter while utilisation rate declined to 75 percent as against 76 percent Q-o-Q.

10. TechM’s largest telecom client, BT, continues to be loss-making. Kotak Institutions believes TechM’s earnings in the second half of financial year 2014 will be weak due to forex losses and wind-down of British Telcom’s revenue amortisation.

“TM’s aggressive hedge program will weigh on earnings in 2HFY14. We expect forex loss of US$25 mn in 2HFY14 and US$40 mn in FY2015E at the current Re/USD rate,” it said.

“Wind-down of BT revenue amortization that contributed roughly $8 million to revenues, EBITDA and net income on quarterly basis. This amount will reduce to US$2 mn in 4QFY14 and nil in 1QFY15. This would have an EBITDA margin impact of 100 bps,” it added.