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Tech Mahindra Q4 preview: Ebit margin likely to fall on rupee appreciation

Tech Mahindra is slated to announce its fourth quarter results for the financial year 2018-19 (Q4FY19) on Tuesday. The IT services major is expected to report a mixed set of numbers with Ebit (earnings before interest and tax) margin likely to decline, while revenue in constant currency (CC) terms is projected to grow between 1 and 3 per cent on a sequential basis. 

Update on the 5G rollout, commentary on large deal wins, growth in communication and enterprise verticals, attrition trend and outlook on Ebit margin are the key things to watch out for in the results announcement.

For the recently concluded quarter, analysts at IDBI Capital forecast CC revenue growth of 1 per cent on QoQ (quarter-on-quarter) basis, driven by a 2.5 per cent QoQ growth in the communications vertical. 

"Given the strong growth of 4.2 per cent QoQ in Q3FY19 and seasonal weakness in Healthcare vertical, we forecast the Enterprise business to be flat QoQ. We factor in cross-currency tailwind of nearly 50 basis points (bps)," they said in a result preview note. 

The brokerage expects EBIT margin to decline by 30bps QoQ to 15.8 per cent against 16.1 per cent in the previous quarter, due to rupee appreciation and weak growth. In the year-ago period, the figures stood at 13.8 per cent.

In rupee terms, the Pune-headquartered firm is likely to post revenue of Rs 91,82.8 crore, up 14 per cent on year-on-year (YoY) basis and 2.7 per cent QoQ, says a Nirmal Bang Securities report. Net profit, or profit after tax (PAT), is projected to grow 3.5 per cent QoQ and 0.8 per cent YoY at Rs 1,231.9 crore, the brokerage says. It has factored in 3 per cent QoQ CC revenue growth and nearly 30bps cross-currency headwind leading to a growth of 3.3 per cent in US dollar terms.

Over the last year, shares of the company have performed at par with the benchmark index. The stock has gained nearly 14 per cent between May 21, 2018 - May 20, 2019. The S&P BSE Sensex, too has risen around 14 per cent during the period. The S&P BSE IT index, on the other hand, has surged over 17 per cent. 

Centrum Broking expects Tech Mahindra to deliver modest CC revenue growth of 1 per cent QoQ in Q4FY19. It sees Telecom segment to continue to perform well, aided by ramp up of recent deal wins; however the Enterprise vertical is likely to remain flat QoQ. The brokerage forecasts EBITDA margin at 19 per cent, down 30bps QoQ and sees cross currency tailwind of 20 bps.

The brokerage expects PAT to decline 4.8 per cent QoQ and 6.2 per cent YoY to Rs 1,145.7 crore. 

Analysts at Prabhudas Lilladher sees a cross currency tailwind of 50bps. They, however, expect forex gains to fall in Q4FY19. TCV (Total contract value) is estimated to be around US$ 280- 300 million range, according to their preview note.