Tag - TechM

Wage hikes impacted margins in Q1FY22 – Tech Mahindra

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 15,885 (+0.8%) as it closed near the intraday high level of 15,983. Among the sectoral indices, REALTY (+4.8%), AUTO (+1.4%), and IT (+1.1%) ended higher, and there were no sectoral losers. Among the stocks, TITAN (+3.6%), SHREECEM (+3.5%), and BPCL (+3.1%) led the gainers while UPL (-2.3%), TATASTEEL (-1.5%), and BAJAJFINSV (-0.6%) led the losers. 

Excerpts of an interview with Mr. CP Gurnani, MD&CEO, and Mr. Milind Kulkarni, CFO of Tech Mahindra (TECHM) with CNBC TV18 on 30th July 2021:

  • A few of the things that worked well for TECHM over 1QFY22 were that the company focused on bringing in large deals that help in bringing order backlog and predictability in the operations. 
  • All of the company’s capital allocation is towards cloud and artificial intelligence (AI). TECHM has also made 5G investments in software-defined networks and cloud-based networks. The company usually looks forward to deal wins of US$ 800-1,000 mn every quarter and has signed one of its largest deals in healthcare in 1QFY22.
  • The company did better in a seasonally weak quarter and was able to maintain margins of 15%. There could be tailwinds coming from operating leverage and headwinds coming in terms of a higher cost of the employee addition and retention. Yet, the company is confident of maintaining the EBITDA margin.
  • Speaking of the company’s costs, there have been two increases. One is the salary increments, second is that the company had to employ a higher number of onsite contractors due to Covid restrictions. The company recovered from the impact partly through operational efficiency with improved utilisation of 60 bps and through increased offshoring.
  • Inorganic growth is going to continue to be the company’s differentiator. The company has improved a lot of synergy goal delivery, and integration capability. The company is also getting a lot of management talent through its acquisitions.
  • The company had planned for 16-18% attrition as the overall demand is not only for Tech Mahindra. The management has repurposed the company to look at tier 2 cities like Nagpur, Trivandrum, Chandigarh, Bhubaneshwar, and Kolkata for hiring. But the management may give another salary hike if the market moves in that direction.

Asset Multiplier Comments

  • As the country recovers from the second covid wave, the strong demand for the entire IT sector augurs well for the company in the mid to long term.
  • With strong deal wins, robust pipeline, margin levers like automation, offshoring, and cost optimization by centralising the back offices of newly acquired entities, TECM is confident of delivering 15%+ EBIT Margins. We believe this confidence is justified. 

Consensus Estimate: (Source: market screener website)

  • The closing price of TECHM was ₹ 1,206/- as on 2-August-2021.  It traded at 19x/18x/16x the consensus earnings estimate of ₹ 63/69/77 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,210/- implies a PE multiple of 16x on FY24E EPS of ₹ 77/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

IT industry adopting new methods to tackle the crisis: C P Gurnani Chief Executive Officer (CEO) and Managing Director (MD) of Tech Mahindra

Update on the Indian Equity Market:

On Friday, NIFTY ended up 170 pts down (-2.06%) at below 8,100 level as ratings downgrade for the banking sector, due to the impact of the crisis and ensuing stressed asset concerns, impacted the financial stocks.

Among the sectoral indices, PHARMA (4.8%), and FMCG (0.7%) were the only gainers while PVT BANK (-5.5%), BANK (-5.3%) and FIN SERVICE (-4.3%) were the top losers. SUNPHARMA (+9.6%), CIPLA (+8.3%) and ITC (+6.7%) were the top gainers. AXISBANK (-8.9%), INDUSINDBANK (-8.3%) and ICICIBANK (-7.4%) were the top losers.

IT industry adopting new methods to tackle the crisis: C P Gurnani

Chief Executive Officer (CEO) and Managing Director (MD) of Tech Mahindra

India has spent only 0.3 per cent (of the GDP) and the World Bank has suggested the countries to spend up to 6-7 per cent said Mr Gurnani.

The world is heading towards a ‘new normal’ due to the current crisis, by almost forcing businesses to work from home, the IT industry has learnt a lot from this event.

Edited excerpts of an interview C P Gurnani, Chief Executive Officer (CEO) and Managing Director (MD) of Tech Mahindra; dated 31st March 2020:

His views on the current crisis and its impact on IT industry – He is of the opinion that India has been very lucky. Even today, only ~ 1,100 cases though it’s true that India’s testing infrastructure is not as strong as the US. Everyone is also praying that with rising temperature, the propagation of the virus will be reduced. So, he is not expecting further lockdown but probably a new normal will be kicked in. The new normal is, people will keep safe distance and they will be a lot more hygienic than ever before.

When asked what the industry as a whole has learnt, he divided this into three chapters. The first one is the period ‘before the crisis’, second is ‘during the crisis’ and third is ‘after the crisis’. He said that everyone knew that they have to become healthy, but had been ignoring it. Everyone knew that they have to reduce pollution. During the pandemic, many things have become reality. It was an opportunity for Tech Mahindra and others to take those decisions, which were never taken before. Tech M have now introduced many collaborative tools and launched workstation as a service, remote diagnostics networks, content delivery platforms and omni-channel retail experiences and so on. Many of these platforms were ready but were not launched yet, but now it is becoming a reality.

When asked about the challenges in the ‘post crisis’ environment he stated that the reality is the government agencies have now officially declared recession. India has spent only 0.3 per cent (of the GDP) and the World Bank has suggested the countries to spend up to 6-7 per cent. He thinks there is headroom to kick-start the economy. Consumers’ confidence comes back very fast. Infrastructure spending will increase the cash flow. Though the B2B businesses will take little longer (to come back to shape), he thinks the doomsayers are being very negative. It is less than a year cycle of recovery.

His comments on hospitality, travel and aviation sector: Hospitality sector is not a big one for Tech M as it contributes less than 3 per cent of the total revenue. Travel and hospitality have also seen these challenges in the past. Besides, this sector has always been the first one to get impacted. But the sector also bounces back.

When asked about the benefit to Tech M from the Telecom Vertical as the company has a good exposure to this sector, he said that he is not denying it but everyone is in crisis. Keeping the human capital intact and lights on are important themes.

He was asked about the sales team performance, whether they are still chasing for deals on ground or stopped. He replied that everyone is talking to everybody. No conversation has stopped. In fact, the number has increased. However, we need to remember that the sales team are not talking to organizations, but only to individuals. Clients are not having their board meetings or committee meeting now. Everyone is on a fire-fighting mode. Overall, he is proud of the associates for the way they have rallied. Offices in the Philippines and India are not working, but none of Tech M’s customers has been impacted.

He also added that almost 90 per cent or their employees are working from home. The remaining go to office because of the data security norms. So, the density is less than 6 per cent in the offices. Work from home has actually helped in enhancing the overall productivity. They are using various tools to measure the productivity.

His views on laying off staff to withstand the business losses in IT industry: Each company has its own strategy. What Tech M have conveyed to their people is that the company would rather offer advances to their employees who earn less than ₹ 35,000 per month. They will offer this to temporary or even sub-contract workers, as Tech M understands they require their support a lot more.

With regards to buy back, he said that looking at the current scenario he feels it will be unfair at this point to take advantage and he won’t recommend it to the board.

Consensus Estimate: (Source: market screener, investing.com websites)

The closing price of Tech M was ₹ 524/- as of 3-April-20. It traded at 10.4x/ 9.6x/ 8.6x the consensus EPS estimate of ₹ 49/ 53/ 59 for FY20E/ FY21E/ FY22E respectively.

Consensus target price of ₹ 793/- implies a PE multiple of 13.4x on FY22E EPS of ₹ 59/-