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Tech Mahindra Q1 preview: PAT may dip 30% YoY; opportunities in 5G eyed

IDBI Capital expects total contract value (TCV) of US$250 million to US$300 million during the quarter under review.
Tech Mahindra, the Pune-headquartered information technology (IT) services company, is slated to announce its financial results for the first quarter of the fiscal year 2020-21 (Q1FY21) on Monday, July 27.

So far, most IT companies have posted better-than-expected results for the April-June period, resulting in a huge upside in their stock prices. According to a recent report by Business Standard, the combined weight of IT companies in the benchmark Nifty50 index is now at a five-year high of 15 per cent as these companies continue to outperform the broader market. READ MORE

At the bourses, shares of Tech Mahindra slipped nearly 4 per cent during the April-June period. In comparison, the S&P BSE Information Technology index surged 16 per cent while the benchmark S&P BSE Sensex gained 18.48 per cent. during the quarter.

Here's a quick look at what leading brokerages expect from Tech Mahindra's June quarter nos.

UBS

The brokerage expects US dollar revenue to decline by 9.3 per cent quarter-on-quarter (QoQ) and 5.8 per cent year-on-year (YoY) while constant currency (CC) revenue is likely to decline by 8.9 per cent QoQ and 5 per cent YoY. Earnings before interest, and tax (EBIT) margin expected to decline 109 basis points (bps) QoQ to 8.9 per cent.

ICICI Securities

Tech Mahindra, analysts at ICICI Securities note, was severely impacted by the ongoing Covid-19 pandemic and is expected to report 8.7 per cent QoQ decline in dollar revenues due to anticipated dip in Business Process Services (BPS) revenues, network revenues, seasonal dip in Comviva revenues, and project deferrals. Revenue in rupee terms could decline by 5.6 per cent QoQ and 3.5 per cent YoY to Rs 8,959 crore. Earnings before interest, and tax, and amortisation (EBITDA) margins is also expected to dip 199 bps QoQ to 12.2 per cent due to a decline in utilisation and negative operating leverage. Net profit is estimated at Rs 682 crore, down 28.9 per cent YoY, and 33.2 per cent QoQ.

Opportunities in 5G, improvement in discretionary spending, margin improvement in portfolio companies, outlook on BPO revenues, and long-term growth opportunities are some of the key things to watch out for.

IDBI Capital

Analysts at IDBI Capital forecast CC revenue decline of nearly 8.8 per cent QoQ despite factoring 100bps benefit from the consolidation of Cerium Systems and Zen3 Infosolutions. It factors cross-currency headwind of nearly 55bps. In rupee terms, revenue is seen at Rs 2,964.9 crore, down 1.6 per cent QoQ and up 19.3 per cent YoY. EBIT margin is expected to decline by nearly 120bps QoQ and 266 bps YoY to 8.8 per cent, impacted by a decline in utilisation which would offset the benefit from rupee depreciation, lower travel cost, and cost control. Net profit is pegged at Rs 753.8 crore, down 26.2 per cent QoQ and 21.4 per cent YoY. The brokerage expects total contract value (TCV) of US$250 million to US$300 million during the quarter under review.

Axis Securities

The brokerage expects Tech Mahindra to report a revenue decline of 8 per cent in CC terms. Margins are expected to contract by 83 bps QoQ. In rupee terms, revenue is seen declining 5.5 QoQ to Rs 8,970 crore. On YoY basis, the numbers are expected to grow 3.7 per cent. EBITDA is seen at Rs 1,200, down 11 per cent QoQ and 8.7 per cent YoY. Net profit is expected to slip 10.9 per cent QoQ and 2 per cent YoY to Rs 910 crore.

"Watch out for deal total contract values (TCVs) and pipeline from communication vertical, pricing scenario, attrition, commentary on growth outlook on margins/ Days Sales Outstanding (DSO) day, and 5G rollout," it says.



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