Research Report : Tech Mahindra

Summary

Tech Mahindra is a multinational information technology services and consulting company that is part of the Mahindra Group. It's part of the Mahindra Group and has its headquarters in Pune and a registered office in Mumbai. Tech Mahindra is a $6.0 billion company with over 148,000 employees across 90 countries. The company was ranked 5th in India's IT firms and overall No. 47 on Fortune India 500 list for 2019. It has 1,262 active clients as of June 2022.

About the company

Tech Mahindra, a major IT company, has reported significant changes in its Q2FY24 consolidated net profit. Specifically, the company's net profit has fallen by 61.1% year-on-year (YoY). In Q2FY24, the net profit was ₹505.3 crore, which shows a major decrease compared to the same quarter of the previous year, when the net profit was ₹1,299.2 crore.

About Us:

Tech Mahindra is a multinational information technology services and consulting company that is part of the Mahindra Group. It's part of the Mahindra Group and has its headquarters in Pune and a registered office in Mumbai. Tech Mahindra is a $6.0 billion company with over 148,000 employees across 90 countries. The company was ranked 5th in India's IT firms and overall No. 47 on Fortune India 500 list for 2019. It has 1,262 active clients as of June 2022.

The company began as a joint venture with British Telecom, known as Mahindra-British Telecom, in 1986. The Mahindra Group, primarily involved in manufacturing, automobiles, and steel, ventured into telecom and IT as a strategic move to diversify. By 1995, it had established an office in the UK and expanded to Germany in 2001. In 2006, the company changed its name to Tech Mahindra.

Tech Mahindra has made significant acquisitions and mergers throughout its history. Notably, it acquired Satyam Computer Services in 2009, after the latter was rocked by a financial scandal. This acquisition made Tech Mahindra a significant player in the Indian IT industry. In 2013, Tech Mahindra announced the completion of its merger with Mahindra Satyam, creating the nation's fifth-largest software services company with a turnover of $2.7 billion

The company provides a variety of services and solutions, including consulting, SAP, Oracle, digital supply chain services, infrastructure management services, integrated engineering solutions, BPO, platform solutions, network services, and testing services. It also provides new generation solutions, such as cloud computing, big data, machine learning, artificial intelligence, cybersecurity, data analytics, and Internet of Things (IoT).

Tech Mahindra's commitment to innovation is reflected in its recent recognition as a certified Center of Excellence (COE) partner by Soroco for Task Mining. The company continues to grow and innovate, maintaining a strong presence in the global IT landscape.

Management and Leadership Team:

Tech Mahindra's management team is led by several key individuals:

• Anand Mahindra: Chairman of the Board. Anand Mahindra is the Chairman of the Mahindra Group, a multinational conglomerate with operations in over 100 countries.

• CP Gurnani: CEO & Managing Director. CP Gurnani is responsible for the strategic direction of the company and its portfolio of innovation and technology solutions.

• Vineet Nayyar: Vice Chairman. Vineet Nayyar has played a key role in the company's growth and global expansion.

• Manoj Bhat: Director. Manoj Bhat is also the Group CFO of Tech Mahindra and is responsible for all financial aspects of the company's operations.

• Other notable members of the management team include Rohit Anand (CFO), Atul Soneja (COO), and several regional heads responsible for the company's operations in the Americas, EMEA, and Asia Pacific regions.

Tech Mahindra's management team has been instrumental in its growth and success. They have overseen numerous acquisitions and strategic initiatives that have positioned Tech Mahindra as a leading global IT services and consulting company. The team's diverse backgrounds and expertise across various industries and technologies have also contributed to the company's ability to innovate and stay ahead in the rapidly evolving IT landscape.

Latest quarterly results:

Tech Mahindra's Q2FY24 consolidated revenue from operations has seen a decrease of 2% YoY, falling to ₹12,863.9 crore from ₹13,129.5 crore in the year-ago period. In US dollar terms, the company's revenue was $1,555 million, marking a decrease of 5.1% YoY and 2.8% QoQ.

The company's Q2FY24 EBITDA was ₹1,072 crore, indicating a drop of 19.9% QoQ and 46% YoY. In US dollar terms, the EBITDA was $129 million, a decrease of 20.5% QoQ and 47.3% YoY.

On Wednesday, the share price of Tech Mahindra ended at ₹1,141.70 on BSE, which was a 1.16% decrease.

Alongside its Q2FY24 financial results, Tech Mahindra Limited announced an interim dividend of ₹12 per equity share. The face value of each share is ₹5. The board of directors declared this interim dividend at a recent meeting. The record date for determining the members entitled to receive the interim dividend is November 2, 2023. Equity shareholders of the firm whose names are listed as beneficial owners of the shares as of that date, in the records of depositories or the company's register of members, will receive the interim dividend on November 21, 2023.

PROS: The company in question has a dividend payout ratio of 75.7%.

CONS: The company has delivered a poor sales growth of 11.6% over the past five years.

KEY POINTS:

Services Offerings:

Tech Mahindra, an Indian multinational technology company, offers a wide range of services including infrastructure & cloud services, engineering services, application services, data analytics, network services, testing services, performance engineering, security & risk management services, business process services, product engineering, and consulting. The company is globally present with over 150,000 employees across more than 90 countries, serving over 1,200 clients, including several Fortune 500 companies.

In terms of revenue, 88% comes from IT Services and 12% from Business Process Outsourcing.When breaking down the revenue by verticals, Communications makes up 40%, Manufacturing 16%, Banking, Finance & Insurance 16%, Technology, Media & Entertainment 9%, Retail, Transport & Logistics 8%, and Others 11%

Geographically, the Americans account for 48% of the revenue, Europe 26%, and the rest of the world 26% bqprime.com. This diverse income stream illustrates Tech Mahindra's global footprint and its ability to serve various industries across different regions.

Part of Mahindra Group:

Tech Mahindra is a part of the Mahindra Group, a global conglomerate with operations in over 100 countries. The Mahindra Group has a diverse presence across various industries including IT, Agriculture, Aerospace, Automotive, Consulting, Defense, Energy, and Logistics. This diversity allows the group to have a wide influence and impact across different sectors globally. Tech Mahindra, as part of this group, benefits from the extensive reach and resources of the Mahindra Group, which enables it to offer a broad range of services and maintain a strong presence in the global IT landscape.

Tech Mahindra Focus:

Tech Mahindra focuses on leveraging next-generation technologies such as 5G, Blockchain, Quantum Computing, Cybersecurity, Artificial Intelligence, and more to enable end-to-end digital transformation for its global customers. The company is committed to investing in emerging technologies and solutions that meet the evolving needs of customers and drive digital transformation.

In line with this, Tech Mahindra has formed a strategic collaboration with Microsoft to bring cloud-powered 5G core network modernization to telecom partners globally. This transformation will help telecom operators develop 5G core use cases and meet growing technological demands, enabling them to modernize, optimize, and secure business operations and develop green networks with reduced costs and faster time to market.

Tech Mahindra's efforts to leverage next-generation technologies are an integral part of their strategy to provide innovative and customer-centric digital experiences. These initiatives allow the company to stay at the forefront of technological advancements and offer cutting-edge solutions to their global clientele.

Finance Analysis and Benchmarking of Tech Mahindra:

Tech Mahindra, one of India's top IT services providers, recently reported a severe drop in profits for the second quarter. This was the largest profit fall the company has experienced in over 16 years, with net profits down by 61.6% - the worst performance since March 2007.

The company's consolidated revenue from operations fell by 2.02% year-on-year, while expenses rose by nearly 7%. A significant contributor to this increase in expenses was a 30% jump in "other expenses".

These financial results were affected by several factors. The challenging macroeconomic environment and the tightening of spending among clients played significant roles. The telecom sector, which Tech Mahindra heavily depends on, remains stressed, leading to a tough near-term demand environment. Furthermore, recovery in revenue growth is not expected until the next financial year.

Tech Mahindra's new deal wins also fell, from $716 million a year ago to $640 million this year. The company's earnings before interest and tax (EBIT) margin contracted from 11.4% to 4.7%. This significant fall in EBIT margin is attributed to one-off expenses due to restructuring of various business operations in the quarter.

In response to these challenges, Tech Mahindra has approved the absorption of three units, which it said would reduce its overheads. The company also announced a dividend of 12 rupees per share.

Key takeaways of recent quarter & Risk factors:

Tech Mahindra, like any other company, faces several risk factors that could impact its business operations. Risk factors that can impact a project or a business can be categorized into internal and external factors.

Internal Risk Factors:

1. Restructuring and Cost Cutting: Tech Mahindra has been implementing various restructuring measures to reduce its overheads. While these measures are expected to reduce costs in the long run, they can lead to short-term operational challenges and increased uncertainty.

3. Dependence on the Telecom Sector: Tech Mahindra's performance is heavily dependent on the telecom sector, which remains stressed. Any negative developments in this sector could impact the company's revenues and profitability.

4. ESG Risk Ratings: Tech Mahindra's ESG (Environmental, Social, and Governance) risk ratings could also pose a risk. A low ESG risk rating might indicate potential environmental, social, or governance issues that could negatively affect the company's reputation and operations.

External Risk Factors:

2. Macroeconomic Environment: The company operates in a challenging macroeconomic environment. Any further deterioration in the global economy could impact Tech Mahindra's revenues and profitability.

3. Client Spending Behavior: The company's clients have been tightening their spending, which could impact Tech Mahindra's revenue growth. Any further tightening of spending by clients could pose a significant risk to the company.

4. Competitive Landscape: The IT services industry is highly competitive in the market. Any changes in the competitive landscape, such as new entrants or changes in competitive strategies, could impact Tech Mahindra's market position.

    Q2FY23 Results and Outlook:

TechM reported steady numbers in Q2FY23.

• The company's revenue grew by 2.9% QoQ in Constant Currency (CC) terms. If adjusted for the exit of the low margin portfolio, the growth rate is 3.4% QoQ in CC terms.

• The EBIT margins increased by approximately 40 basis points QoQ, standing at 11.4%.

• The New Deal Total Contract Value (TCV) was US$716 million, which is within the guided range.