Tech Mahindra aiming for double-digit growth in FY2022

Tech Mahindra, a mid-sized IT services firm, posted its highest-ever quarterly revenue and profit in the first quarter of fiscal year (FY) 2022.

Its profit of $183.2 million in the quarter ended June 2021 was 24.1 percent over the previous quarter. Tech Mahindra's revenue grew 4.1 percent sequentially to $1.3 billion. This is also 47.5 percent more than its revenue in the same quarter last year.

The results were "slightly ahead of expectations – which were quite low to begin with," according to institutional equity research company Phillip Capital in a report.

For years, Tech Mahindra, which generated revenue of $5.1 billion in FY 2021, has had a slow growth rate compared to its peers.

The Mumbai-headquartered company had a revenue of $1.2 billion in FY 2012, the year before it integrated Satyam in its operations. (Tech Mahindra had acquired Satyam Computers in April 2009.)

Tech Mahindra's revenue in FY 2017 was $4.3 billion. It has grown at a compounded annual rate of 3.5 percent in five years.

Relatively, HCL Technology, which generated revenue of $6.96 billion in FY 2017, grew at a compounded rate of 7.9 percent in the same period. It clocked $10.2 billion in FY 2021.

Market leader Tata Consultancy Services (TCS), the largest technology-services exporter in India, has grown at a faster compounded rate (4.75 percent) on a higher revenue base ($17.58 billion in FY 2017) in five years.

Here are five takeaways from Tech Mahindra's first-quarter results:

1. Its deal-wins signify a healthy quarter

Tech Mahindra won deals worth $815 million in the quarter ended June 2021. Analysts at Emkay Global noted in its report that it is a robust pipeline, with a good split across communication, media and entertainment ($352 million) and enterprise ($463 million).

“We continue to see strong traction in large deal wins as we are helping our customers in integrated digital transformation,” said C P Gurnani, Managing Director and CEO of Tech Mahindra, in a statement.

The company is evaluating its performance by the number of $50-million clients and the volume and value of the large deals.  However, it added only one more client to the $50 million+ band taking the count to 22, compared to the previous quarter and year when it was at 21.

2. Tech Mahindra sees double-digit growth

Led by the strong deals and an all-time high deal pipeline, Tech Mahindra is confident of double-digit growth in FY 2022. It expects the communications and media segment to make that strong push.

“The double-digit revenue growth in FY22 (as guided) will be a first for TechM (Tech Mahindra), after half a decade – a testimony of its significant underperformance,” wrote Phillip Capital in the report.

3. It relies overtly on the telecom industry

Revenue from communication, media & entertainment grew 3.2 percent sequentially, even when the first quarter is seasonally weak for its mobility business. This segment contributes about 40 percent to its annual revenue.

The banking and financial services industry (BFSI) contributes around 16 percent of its revenue. It grew 3.7 percent sequentially. This is where Tech Mahindra lags behind its Indian counterparts significantly. Large Indian IT firms derive between 30 percent and 35 percent of revenue from the BFSI industry, which is a large consumer of software and technology services.

For Tech Mahindra, over 40 percent of revenue is from communication, media and entertainment, which are unlikely to be as profitable as BFSI for a technology services company.

4. Margins dip over previous quarter

The company’s EBIT margin fell 130 basis points compared to the previous quarter to 15.2 percent due to wage hikes in the first quarter of FY 2022. Tech Mahindra expects the margin to stay at about 15 percent in FY 2022.

On the brighter side, Tech Mahindra's utilisation rate was at 88 percent. As travel costs rise again, along with the highest-ever utilisation rate, analysts at Phillip Capital note in the report that maintaining margins would “not be sustainable in the long term.”

5. Attrition rate is a concern

Tech Mahindra’s voluntary attrition rate rose to 17.2 percent, up 390 basis points. It has 1.26 lakh employees, as of June 30, 2021. Like all IT service-providers, rising attrition rates are a concern for Tech Mahindra as well.

The company plans to hire more people, the Tech Mahindra's Chief People Officer, Harshvendra Soin, said in an earnings call with analysts. He did not specify a number.