Tech M: overreaction or a re-rating

Written by Akash Joshi | Updated: Jan 27 2010, 04:04am hrs
Share price of Tech Mahindra took a beating as the firm announced its results. It closed at Rs 1,120 per share, around 7.8% lower than the previous day. The reason being lower than expected operating margins, with pressure expected to continue, despite revenue growth. Net sales improved 4% on a sequential basis to touch Rs 1,187.3 crore, EBITDA declined by 4% to touch Rs 280.7 crore taking the margins down by 200 basis points, over the quarter ended September 2000, to touch 23.6%. The net profit, at Rs 173 crore, a 2.3% sequential growth was a tad below expectations. Analysts at Emkay Research reckon that the companys wide realisations are roughly down by 8% over the past year, thereby, indicating price reductions at British Telecom (BT) to be 14-15%. The BT group accounts for nearly 49% of its revenues. Analysts feel the revenue growth would have been lower as the company received around Rs 968 crore as restructuring charges from BT and has recognised around Rs 150 crore over the last three quarters. But the management holds that this move has been fair and would amortise the amount over a period of time thereby reducing a swelling up impact. Overall, the cash flow has helped the company reduce around Rs 800 crore of the Rs 2,380 crore debt taken to fund the Satyam Computers take over. The relationship with BT has strengthened and analysts at BNP Paribas reckon that the company has around 800 million worth orders from BT and this will sustain revenue growth. Overall, top client revenues remained at $117 million. Revenue performance outside top client remains credible and is seen positive as the share of revenues from non-top 5 as a percentage to the top 2-top 5 clients was up from 7% to 24.5% on a sequential basis. Revenue performance from outside BT is strong at a 16% growth in the quarter ended December 2009 over the previous quarter. The company has been constantly working on this and has seen the second quarter record a 8% growth (sequential) and the first quarter around 7%. Employee hiring during the quarter was impressive at around 4,000 new additions coming in. All eyes are trained on the negotiations with BT on the pricing arrangements and there would be margin pressure coming on. The current downturn could then well be a reaction to the results rather than a full-scale re-rating.