Tech Mahindra reports disappointing Q1 numbers; net profit falls 38% to Rs 692.5 crore

Mumbai: The country's fifth largest IT services company Tech Mahindra on Wednesday reported a 38 per cent fall in June quarter net profit at Rs 692.5 crore due to a sharp narrowing of the profit margins.

The Mahindra group company had reported a net profit of Rs 1,131.6 crore in the corresponding April-June period last year. In the preceding quarter, the same stood at Rs 1,117.6 crore.

Its revenues slid to Rs 13,159 crore in the reporting quarter from the Rs 13,718 crore in the preceding March quarter, and was only 3.5 per cent up when compared to the year-ago period.

The company's outgoing Chief Executive Officer and Managing Director C P Gurnani termed the quarter as one of the toughest he has seen in the last five years, and pointed to reverses in its mainstay of Communications, Media and Entertainment (CME) impacting the overall numbers.

Tech Mahindra reported one of the lowest operating profit in the IT services industry at 6.8 per cent as against 11 per cent in the year-ago period and 11.2 per cent in the quarter-ago period.

Its chief financial officer Rohit Anand attributed the narrowing of margins to a dip in service revenue which had a 2 percentage point impact, provisions made on the back of a client filing for bankruptcy (another 2 percentage points) and a seasonal reverses in the subsidiary Comviva which serves telecom clients.

CME sector clients, which form 42 per cent of the revenue for Tech Mahindra, unexpectedly hit the brakes during the quarter, Gurnani told reporters, adding that his costs and budgeting was not aligned to this eventuality.

From a revenue standpoint, CME sector reported a 8.2 per cent decline when compared to the same period last year and was down 9.4 per cent when compared to the quarter-ago period.

A statement from the company said the banking, financial services and insurance as well as retail, transport and logistics sectors showed a dip in revenues.

Gurnani pointed to slowdown in projects with two-three startups, where the funding winter has impacted the company.

He exuded confidence that the company will do better in the future by asserting that it has the right building blocks.

Without specifying the aspects that he is optimistic about, Gurnani said the next quarter will be better for the company.

However, the new deal wins were down sharply during the quarter and the company's total contract value continued with its downtrend seen lately.

The net new deal wins came at USD 359 million in the latest June quarter as against USD 802 million in the year-ago period and USD 592 million in the preceding quarter.

Gurnani said the deal wins aspect is a mixed bag where the client conversations on possible engagements have actually increased but signings are taking longer.

He said that earlier, definite closures were happening in a quarter while now, it will take over two quarters.

Reverses on the business front had an impact on staffing as well, with the overall employee base at Tech Mahindra declining by over 6 per cent when compared to the year-ago period to 1.48 lakh people.

However, the attrition rate improved to 13 per cent from the 23 per cent in the year-ago period and 15 per cent in the quarter-ago period.

Tech Mahindra CEO and MD-designate Mohit Joshi, who has joined the firm from bigger rival Infosys, said he is enthused with the depth of client engagements and the cutting edge service lines.

Tech Mahindra has had a challenging set of results in the June quarter, Joshi said, adding that he is confident about the company's prospects in the medium to long term.

Shares of the company closed 0.84 per cent down at Rs 1,144.5 a piece on the BSE ahead of the results announcement as against a surge of 0.53 per cent on the benchmark on Wednesday.