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Tech M Q1FY23 result review –Margins bottom out in Q1

ICICIdirect Research 27 Jul 2022 DISCLAIMER

What’s buzzing:

Tech Mahindra reported 3.5% QoQ CC growth, EBIT Margins dip 220bps to 11%       



The company's revenues increased by 3.5% QoQ in constant currency terms, while it was up 1.5% QoQ in dollar terms to US$ $1,632 million. In terms of geographies , the revenue growth was aided by 4.2% QoQ growth in US ( 50% of mix) , while the sequential growth in Europe/ RoW was weak as they declined by 1.9%/0.4% respectively. In terms of verticals, the growth was aided by Technology & Media , Retail & Manufacturing which grew by 6.4%/5.5%/3.9% QoQ respectively, while BFSI/ Communication (57% of the revenue mix together) reported -2.9%/+1.0 QoQ revenue growth. The company’s EBIT margin dip 220bps QoQ to11.0% as there was (-100bps) impact of higher salary and sub-contractor expenses, (-80bps) impact of visa costs & seasonality, (-100 bps) on SG&A cost normalisation while there was (+50bps) pricing benefit in the quarter .  The Net new deal TCV 2%/20.7% on YoY/QoQ to US$802mn. The company added 6,862 employees in Q1, taking its total employee base at 158,035.  LTM attrition declined 130bps QoQ to 22.2%.


Our Perspective:

The company’s growth for the quarter was strong while management not seeing any evidence on moderation of tech spending by its clients and demand pipeline continue to be robust. New deal TCV was in the guided range of US$700mn –US$1bn range albeit was down sequentially. LTM attrition is down QoQ which is expected to support margins in the medium term. The company expects 100-150bps margins  expansion in Q2 itself due to better utilisation and few non- recurring expenses like visa etc and now guiding for 14% exit EBIT margins in Q4. Pricing has been one of the lever for margin improvement going forward as they have been getting price hike in the contracts. Pyramid optimisation is another lever where the company will continue to add freshers ( they added 10,000 freshers in FY22) which would accelerate flattening of curve and utilisation will improve going forward as the freshers will be deployed in projects. We baked in 11.8%/8.4%/11.1% Revenue/EBITDA/PAT CAGR growth over FY22-24

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