Tech Mahindra's Q1FY25 Financial Results Signal Promising Growth Amid Challenges

Introduction

On July 25, 2024, Tech Mahindra announced its financial results for the first quarter of fiscal year 2024-25 (Q1FY25). The results showcased a 23% rise in net profit to ?851.5 crore despite a slight dip in revenue. This blog post will provide a detailed analysis of these results, their implications, and what they mean for investors, financial analysts, and tech enthusiasts. We’ll examine the key highlights, CEO insights, segment performance, deal wins, and strategic collaborations. By the end of this post, you’ll have a comprehensive understanding of Tech Mahindra’s current position and future outlook.

CEO's Perspective

Mohit Joshi, the CEO and MD of Tech Mahindra, expressed optimism about the Q1 results. He stated, "It is encouraging to see positive momentum in most industry verticals, which has led to revenue growth and margin expansion in an otherwise seasonally weak quarter. We continue to focus on execution and are on track to achieve our stated goals for FY27." This reflects the company’s strategic focus on long-term growth amidst short-term challenges.

Key Highlights of Tech Mahindra's Q1 Performance

P&L Account: Net Profit and Revenue

• Revenue:
• $1,559 million, a 2.6% year-over-year (YoY) decline.
• Revenue in constant currency (CC) terms fell by 1.2% YoY.
• Operating Profit:
• Margins expanded by 1.90% to 12%.
• EBITDA rose 16.9% YoY to ?1,564 crore, with a margin of 12%, up 190 basis points (bps) YoY.
• Earnings per Share (EPS):
• ?9.62.

The financial performance shows a mixed bag, with a decline in revenue but a significant improvement in operating profit margins. This balance indicates effective cost management strategies despite revenue challenges.

Headcount

• Total Headcount:
• 1,47,620 in Q1FY25, an increase of 2,165 sequentially.
• Attrition Rate:
• IT attrition rate on a last twelve months (LTM) basis stood at 10.1%, down 270 bps sequentially.
• Utilization:
• Including trainees, the utilization rate was 86.1%.

The increase in headcount and decrease in attrition rate are positive signs, indicating employee satisfaction and effective recruitment strategies.

Segment Performance

• Manufacturing:
• Grew by 6.4%.
• Healthcare and Life Sciences:
• Increased by 6.1%.

These segments showed robust growth, contributing significantly to the overall performance of the company.

Deal Wins

• Net New Deal Bookings:
• $534 million, up from $500 million in the previous quarter and $359 million in the year-ago period.
• Cash and Cash Equivalents:
• ?8,055 crore as of June 30, 2024.

The increase in deal bookings highlights Tech Mahindra’s strong market position and its ability to secure new business consistently.

Collaborations

• Dell Technologies and Intel:
• Collaboration to implement Tech Mahindra's Indigenous foundational large language model (LLM) Project Indus's 'GenAI in a box' framework globally.
• IBM:
• Partnership to help businesses worldwide responsibly accelerate the adoption of generative AI (GenAI), integrating TechM's amplifAI suite with IBM Watsonx AI and data platform.

These strategic collaborations with industry giants like Dell, Intel, and IBM underscore Tech Mahindra’s commitment to innovation and technological advancement.

Detailed Analysis

Tech Mahindra began FY25 on a positive note, with a 29% sequential jump in net profit, largely due to a 14% reduction in subcontracting costs. Despite this growth, the net profit of $102 million fell short of analysts' expectations of $104.6 million, as per a Bloomberg poll.

The company’s revenue saw a modest 0.7% sequential increase to $1.56 billion, driven primarily by growth in the healthcare business, which contributed $120 million, a significant portion of the overall incremental revenue.

CEO Mohit Joshi, while optimistic, maintained a cautious outlook, highlighting that the demand environment has shown slight stability but no dramatic changes from the previous quarter. This cautious optimism is essential for setting realistic expectations for stakeholders.

Strategic Roadmap and Future Outlook

The company’s three-year roadmap, Project Fortius, aims to achieve a 15% operating margin by March 2027 and to grow revenue faster than its peers, primarily through organic growth and investments in key accounts. Despite a positive start, analysts remain cautious. Manik Taneja of Axis Capital noted, "We see TechM's Q1FY25 as a steady quarter and continue to provide initial confidence on the multiyear transformation ahead, which we back and remain positive about."

Geographical and Sector Performance

Tech Mahindra derives over half its revenue from North America, with $817 million coming from the region. The communications vertical, although a significant revenue source, saw a decline of over $150 million since March 2023. This geographical and sector-based analysis helps in understanding where the company needs to focus its efforts to achieve balanced growth.

Industry Comparison

Among its peers, LTIMindtree reported a 2.5% growth in revenue and a 3% rise in net profit. Tech Mahindra’s headcount growth contrasted with mixed trends among other top IT firms, with TCS and Wipro adding employees, while Infosys and HCL reported reductions. This comparison provides context for Tech Mahindra's performance within the broader industry landscape.

Market Reaction

Following the announcement, Tech Mahindra’s share price dropped over 5% in early trade on Friday, reflecting mixed sentiments despite meeting street estimates. Emkay Global Financial Services and Motilal Oswal provided cautious optimism, adjusting their target prices and maintaining neutral to positive ratings. Understanding market reactions helps investors gauge sentiment and potential future performance.

Conclusion

Tech Mahindra’s Q1FY25 results indicate a steady start to the fiscal year with notable improvements in profitability and strategic advancements. While the road ahead presents challenges, particularly in the communications sector, the company’s focus on strategic collaborations and cost management positions it well for sustainable growth. As the company continues to execute its Vision 2027 strategy, stakeholders remain watchful of its transformation journey amidst a dynamic industry landscape. For investors and tech enthusiasts, keeping an eye on Tech Mahindra’s progress could yield valuable insights into the future of the IT services industry.

By staying updated with these developments, you can make informed decisions and better understand the evolving landscape of enterprise technology. Whether you are an investor, financial analyst, or tech enthusiast, Tech Mahindra’s ongoing transformation offers a compelling case study in strategic growth and innovation.

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Disclaimer

This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.

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