The stock of Tech Mahindra has dropped over 30 per cent in the last one year. Slower order flows from telecom companies, delay in integrating Lightbridge Communication with itself and margin dilutive acquisitions — Sofgen and Pininfarina — weighed on the stock’s performance.
Operating margins slipped to 16.9 per cent in the latest December quarter from 20.3 per cent last year. Lower utilisations and the heavy onshore component in revenue too played spoilsport.
The stock traded in the band of 15-17 times a year back. However, the company can look to better times ahead.
The company has been trying to broaden its client base. To reduce its revenue concentration in the telecom segment, Tech Mahindra acquired Sofgen in January last year, a Geneva-based IT consulting company that specialises in commercial and retail banking solutions. The company now has access to 150 clients in the BFSI space.
Besides, recently, Tech Mahindra acquired a 60 per cent stake in Pininfarina, a well-known Italian engineering company that has designed cars for Ferrari and Rolls Royce. Pininfarina could complement Tech Mahindra’s capabilities in the automotive space and help the latter expand into Italy and Germany.
Though synergies from acquisitions will take a few quarters to flow in, over the long run, it gives the company the advantage of cross-selling its services.
The demand environment remains weak in the telecom vertical. Consolidation in the industry is impacting growth. In 2015, BT acquired EE, Hutchison acquired O2 and Verison acquired AOL — all three acquiring companies are clients of Tech Mahindra.
Good long-term prospects However, the management indicated that it has not lost market share despite the muted growth.
While the vertical is likely to witness weak traction for a few quarters, as telecom companies draw up new budgets and integrate operations, orders should start to flow.
Given its proven capabilities in network management services and the growing opportunities in the space, the company should do well.
On the margin front, the company’s efforts to pull all levers possible are already showing results. Operating profit margin in the December quarter was 16.9 per cent (15.01 per cent in the June 2015 quarter). Utilisation levels too have improved to 80 per cent.
Recently, Tech Mahindra launched its in-house automation platform — AQT. This should improve productivity. Also, efforts to re-balance the onshore-offshore mix — offshore is now about 37 per cent of revenue, vis-à-vis 40-45 per cent for others — should aid margins.