IT budgets likely to remain flat in the short run

Written by Rachana Khanzode | Updated: Jan 26 2010, 06:05am hrs
Tech Mahindra reported a higher-than-expected revenue of Rs 1,187 crore in the quarter ended December 2009. The increase came on the back of one-time receivables of about Rs 690 crore from its largest client British Telecom. The firm's net profits stood at Rs 172.8 crore, up 2.3% sequentially. Sonjoy Anand, CFO at Tech Mahindra, in an interaction with FE's Rachana Khanzode, says that the firm wants to maintain the current levels of run rate at about $70-72 million coming from BT. He also enslists the reasons for the dip in gross profits:

Your operating profits were down 4% sequentially at Rs 280 crore and 12% down from previous years. What impacted the profits

This has been largely a cumulative impact of the currency fluctuation, pricing and lower utilisation at 73%, down from 75% in the last quarter. We did hire about 4,000 people in this quarter, which led to lower utilisation. We are comfortable with a range of about 75% at the top-end. Also, pricing levels from last year to this year have changed and we did negotiate our prices in the last quarter again. The salary hike of 6% offshore and 2% onsite also did have a marginal impact. The net profit had an additional impact due to the interest amount of Rs 46 crore.

How will price negotiations affect your future growth

Price negotiations are being done with committed volumes. especially for the three large deals that include Barcelona, Andes and Strada that are multi-million, multi-year deals. The Barcelona and Strada contracts have already been negotiated while with Andes, some details are still being worked out. We have already received restructuring fees of about Rs 970 crore for all contracts. There is now one common rate card across all the business being done with BT with definite volume commitments. We will amortise this amount in the revenue line over the life of the contract and as a result, revenues of about Rs 150 crore were recognised in the third quarter. We expect a run rate of $70-72 million from BT and that seems to be stable run-rate. However, we are aggressively working to attract business from other clients.

What about pricing with other clients How is the demand outlook

We expect the pricing to be stable at current levels. We are seeing good traction on this front from clients across geographies. IT budgets are expected to be flat, though we are witnessing an increase in business proposals. The global economy seems to be recovering.

The debt level will go down to Rs 1,400 crore by the end of January 2010. Could you tell us what would be its impact on the interest outflows

In the fourth quarter of 2009-10, the interest to be paid out would be down by almost Rs 15 crore from the third quarter. However, we would continue to repay interest as and when the cash flows come in. We would maintain a cash level of about $50-70 million with a view to running the operations. The additional payment in January would be made from the existing cash levels of $140 million.

How much revenues has the company hedged currently

Our current hedge positions against currency fluctuation are at about $735 million in US dollar/rupees and 280 million in pound sterling/US dollar for a period of five years. We are not looking at changing the time-frame because of the long-term nature of our contracts.