Tech Mahindra is the last of the top tier IT services companies to announce its fourth quarter results. The company reported lackluster numbers with the lowest constant currency growth among the top five listed Indian IT services firms.  In rupee terms, on a standalone basis net profit slid 16% YoY and revenue was stagnant. Though the street has reacted negatively to the muted March quarter performance, analysts are buoyed by strong deal wins, sturdy margin expansion and optimistic management commentary.

Quick Takes:

• Net profit fell 16% YoY to Rs 1,168 crore compared to Rs 1,392 crore a year ago

• The management has guided for a double-digit growth for enterprise business  in FY22 and for the company as a whole

• Tech Mahindra is the largest IT services provider in the telecom space with making up  40% of its revenues

• During the quarter, TechM reported net new deal wins of $ 1.04 billion evenly distributed between communications and enterprise verticals, in March quarter FY21

Q4 sees tepid revenue growth

Tech Mahindra has reported negative constant currency YoY growth throughout FY21. In the March 2021 quarter, dollar revenue was $ 1.33 billion, rising 1.6% sequentially and 2.7% YoY. In constant currency terms, revenue growth was 0.7% QoQ with negative growth of 0.5% YoY. EBIT margins came in at 16.5%, expanding 60 basis points YoY. This was the highest margin in the past six years.

In rupee terms, operating revenues were flat both in YoY and QoQ at Rs 7,507 crore in Q4 FY21. Net profit fell 16% YoY at Rs 1,168 crore compared to Rs 1,392 crore, a year ago.  Free cash flow for the quarter was $ 187 million at 127% of PAT. Revenues from Americas (45.5% of revenues) fell 2% YoY in Q4 FY21 while Europe (26.5% of revenues) and Rest of the World (28% of revenues) were in better shape, with revenues rising 2.7% and 11.5% YoY, respectively. 

Technology (9% of revenues) and BFSI (16.5% of revenues) verticals saw revenues grow in double digits throughout FY21. Continuing with the same momentum, both verticals grew 28% and 10% YoY respectively in the March 2021 quarter. The retail vertical (7.5% of revenues), after strong double-digit growth in the June 2020 quarter has grown by 6% for each quarter of FY21. Communications (40% of revenues) stabilized in Q4 FY21 after witnessing deceleration in the past three quarters. And lastly manufacturing (16.3% of revenues) was the only vertical that saw revenues fall 5% YoY for March quarter FY21.

TechM's growth is the slowest among top tier IT firms, 5G beckons

Tech Mahindra’s growth has been the slowest in Q4 FY21, among the top five IT players. The company had witnessed the slowest WFH transition, lower margins compared to its peer group and lacklustre revenue growth in FY21. CP Gurnani, MD and CEO at Tech Mahindra, said that FY21 was a tough year for the company, putting curtains to the 3-year repair phase outlined by the management at the outset of the Covid outbreak. The next two years, FY22-24, is planned for growth acceleration. 

The company operates through two main segments, communications and enterprise. While the enterprise segment, comprising BFSI, manufacturing, media and retail, have stabilized from Covid tremors, communications has been a major drag on overall company revenues. But analysts and investors alike are strongly optimistic on the communications vertical awaiting the 5G rollout. The rollout was delayed by Covid-19 pandemic. 

Speaking on the 5G opportunity, Manish Vyas, President and CEO of the communications and network services business at Tech Mahindra, said that clients want modernization of customer engagement platforms, including the underlying cloud native architecture which gives them flexibility and hyperscale ability to be ready for 5G. He further added that 5G is not just about network modernization but also about systems and backend process modernization. 

Though the 5G commercial rollout is expected by early 2022 in India, US and Europe are witnessing faster coverage which will be enhanced further with declining Covid-19 cases and casualties due to aggressive vaccination drive. But for IT companies, revenues will pour in after a lag as telecom service providers approach them for managing their network, cloud migration services and IoT platforms, once their hardware & software installation is completely set up. Though this might take a few more quarters, growth is definitely on the anvil for Tech Mahindra.

While the street awaits payoffs from 5G, the management is also strongly optimistic about the enterprise side of its  business. The management has guided for double-digit growth for enterprise business in FY22 and expects  strong double-digit growth in all four verticals manufacturing, retail, technology and BFSI. And while they stayed non-committal on communications growth rate, the management asserted that the company on an overall basis will deliver double-digit growth in FY22. 

Speaking on the fall in net profit in Q4 FY21, CFO Manoj Bhat clarified that the impact was mainly due to higher tax provision of 32.5% during the quarter instead of the usual band of 24-25% and lower other income. The management has also given above 15% operating margin guidance for FY22.

Tech Mahindra, like the rest of its peers, has outlined a double-digit growth path and even guided for a strong June 2021 quarter, usually weak due to Comviva seasonality. But it’s the net new deal wins of $ 1.04 billion, evenly distributed between communications and enterprise verticals, that is a major highlight of March quarter FY21. The company has been reporting strong net new deals wins over the past three quarters. Net new deal wins were above $400 million in September and December quarters, which have not been translated in revenues yet. Though analysts are optimistic of Tech Mahindra’s strong growth prospects, the street awaits strong revenue conversion and the 5G opportunity to deliver in the near future.