Higher costs hurt Tech Mahindra’s Q3 profit and margins but revenue beats forecast

IT services company Tech Mahindra Ltd posted a 6.8% year-on-year growth in consolidated net profit for the three months ended December 2021 to Rs 1,378.2 crore, falling short of market expectations.

The Street expected India’s fifth-largest IT services company to post a net profit of roughly Rs 1,395-1,400 crore, but higher wages and subcontracting costs dampened margins for the Pune-based company.

The company reported consolidated revenue of Rs 11,450.8 crore for the quarter ended December 2021, up 5.2% from the previous quarter and 18.7% from the corresponding period last year.

Analysts had expected Tech Mahindra’s consolidated revenue in the range of Rs 9,500-11,130 crore.

Earnings before interest, tax, depreciation and amortisation stood at Rs 2,060 crore, up 8.7% year on year.

However, operating margins narrowed to 14.8% from 15.2% in the September quarter and 15.9% in the corresponding period last year.

Other key highlights

1) Dollar revenue grew 4.1% quarter on quarter and 17.2% year on year to $1.53 billion aided by recent acquisitions.

2) Dollar profit grew 1.5% quarter on quarter and 3.4% year on year to $183.8 million.

3) The company won new deals worth $704 million, in line with analysts' expectations.

4) Total headcount increased 2.75%, or 3,874 individuals, to 145,067.

5) Wage costs increased 5% quarter on quarter and 13.9% year on year.

6) Subcontracting costs spiked 12.4% sequentially and 56% year on year.

7) Cash and cash equivalent stood at $1.345 billion (about Rs 10,050 crore).

Management commentary

"Our people-first approach combined with sustained value creation this quarter reflects our commitment towards redefining possibilities and competencies in the new normal. We continue to strengthen our presence, deliver broad-based profitable growth and value for our customers, backed by future-ready talent and niche digital capabilities,” said CP Gurnani, managing director and chief executive officer (CEO), Tech Mahindra.

“We continue to transform our operations and add new capabilities enabling us to grow faster while sustaining our profitability. Our focus on operational efficiencies and investments for the future will help us drive exponential value creation in the long run,” said Milind Kulkarni, the company’s chief financial officer.