CP Gurnani opened his press address on Tuesday stating that he has given investors a reason to cheer thanks to the strong performance across verticals in the enterprises segment in the March quarter. True to his word, the stock opened in the green on Wednesday and soared over 8 per cent.
But, the company just about met market expectations with a sequential dollar revenue growth of 0.78 per cent. Revenue from top five clients too was the lowest in the last several quarters at 27.9 per cent, down from 33.1 per cent in the same quarter last year. Attrition stood at 21 per cent, up both sequentially and year-on-year.
So, what has made investors happy?
The news of the company dropping plans to enter the payments bank space and exiting unviable businesses meant that the company is turning its focus back on its core business. This was viewed as a positive move by investors. Also, despite pressure from wage hikes and drop in margins at Lightbridge Communications (LCC) — the US-based wireless engineering services company which was acquired in 2014 — the company was able to hold its operating margins at around 17 per cent, in the March quarter.
The total contract value of the large deals wins was about $300 million in the March quarter, up from $275 million in the December 2015 quarter. Of the new orders, about 40 per cent was in the telecom business.
Communications business In the March quarter, Tech Mahindra’s communications business though recorded a flat growth sequentially, organic growth was strong. Tech Mahindra has indicated that out of the five large deals that it has been chasing for a long time now, one has been finally closed and two are likely to close in the next one-two quarters. Given that two of the company’s top clients — BT and AT&T received regulatory approval for their acquisitions in the March quarter, order flows may now start as these companies integrate their operations.
Telecom players globally are seeing pressure on voice and data revenue because of competition.
But, given Tech Mahindra’s competitive strengths, and an onsite presence now through LCC, it is well placed to derive benefits from a recovery.
However, to compete with larger MNC rivals that vie for large orders, Tech Mahindra cannot bank on lower price-point alone. It should also have better client strategies. At LCC, the company has indicated that much of the integration work is over, but, it may take about a year for it to contribute to overall revenue growth. Tech Mahindra has over the last one year exited from several of LCC’s unviable businesses.
Payments bank exit Tech Mahindra along with Mahindra Finance had received the licence for payments bank in August last year. The two companies had planned to invest about ₹200 crore to set up the new business. But, on Tuesday, Gurnani said the company decided not to pursue the opportunity. This is a positive. Tech Mahindra can now focus resources to strengthen its core business. Setting up a payments bank, involves a lot of capital.
It would have become another revenue stream for the company and helped in non-linear growth, no doubt, but, it would have come at huge costs that would have added to the pressure on margins.