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TechM Q4 preview: Analysts see 52-59% YoY rise in PAT, muted revenue rise

Tech Mahindra
Tech Mahindra is likely to post modest revenue growth in the fourth quarter of the financial year 2020-21 (Q4FY21), believe analysts, led by seasonal strength in Comviva, an entity acquired by the firm in 2012, and improving traction in the manufacturing, BFSI (banking, financial services & insurance) and technology segments.

The profit after tax (PAT) during the quarter under review is expected to vault between 52-59 per cent year-on-year (YoY), as per analysts. Although, the same is likely to decline on a sequential basis.

Most brokerages expect the IT major to clock a 2-4 per cent YoY rise in March quarter revenue (rupee terms) when it posts its results on April 26. Meanwhile, in dollar terms, the figure is expected to grow between 3-4 per cent.

A forecast of muted revenue growth is not a surprise and follows weak new deal signings in the past nine months, said analysts at Kotak Institutional Equities (KIE). "We expect net-new TCV of around $800 million powered by Telefonica deal and reasonable momentum in enterprise deals. Large deal pipeline is robust in our view," they added.

At the bourses, Tech Mahindra has underperformed the benchmark with a rise of 1.87 per cent during the March quarter, as against a gain of 5 per cent in the Nifty50 and 6.61 per cent in the Nifty IT index, ACE Equity data show. On a year-to-date (YTD) basis, the scrip is down 2.4 per cent.

Meanwhile, the investor focus will be on the deal wins, the outlook of communication vertical and 5G opportunity, timelines of wage hikes in FY22 and capital return during the Q4 results announcement.

Here's what leading brokerages' expectations are on key metrics:

Net Profit
At the upper end of the spectrum, analysts at JM Financial expect Tech Mahindra to post a 59.4 per cent YoY rise in PAT at Rs 1.281.6 crore for the March quarter of FY21 as against Rs 803.9 crore reported in the same quarter last year.

On a quarter-on-quarter (QoQ) basis, however, the figure is expected to slide by 2.2 per cent from Rs 1,309.8 crore posted in the preceding quarter of FY21.

On the other hand, analysts at Emkay Global eye a 52.9 per cent YoY rise in PAT at Rs 1,229.4 crore, although, it could fall by 6.1 per cent, sequentially.

According to Edelweiss Financial's estimates PAT could rise 51.5 per cent YoY to Rs 1,217.9, one of the lowest projection among brokerages. The figure, however, is likely to dip by 7 per cent QoQ, it said.

Revenue
Analysts at Phillip Capital project a 2 per cent yearly rise in Q4 revenue (rupee terms) at Rs 9,683.7 crore as against Rs 9,490.2 crore posted in the year-ago quarter. Sequentially, the revenue growth is seen to be flat at 0.4 per cent. Tech Mahindra's revenue in the December quarter stood at Rs 9,647.1 crore.

"We expect modest dollar revenue growth of 1.5 per cent and positive cross currency (CC) impact of 50 bps, translating into CC growth of 1 per cent," the brokerage said. It pegs Q4FY21 dollar revenue at $1,328 as against $1,295 (up 2.6 per cent YoY) in Q4FY20 and $1,309 (up 1.5 per cent QoQ) in Q3FY21.

JM Financial has a more robust estimate of growth in March quarter revenue (rupee terms) at Rs 9,859.4 crore, up 3.9 per cent. The figure could rise 2.2 per cent QoQ. "We are building in 2.5 per cent QoQ CC growth, with ~70bps cross-currency tailwinds," the brokerage said. This translates into a 3.2 per cent QoQ growth in dollar revenue at $1,351, and up 4.3 per cent YoY.

"We expect Tech Mahindra to post dollar revenue growth of 2.1 per cent QoQ and 1.5 per cent QoQ in CC. Year-on-year, we expect its dollar revenue to grow 3.2 per cent to $1,336. The company should also be the key beneficiary of 5G adoption, BPO business and digital adoption," Edelweiss Financial said. The brokerage pegs Q4 revenue (rupee terms) growth at 2.7 per cent YoY and 1 per cent QoQ at Rs 9,743 crore.

Ebit margins
Most brokerages expect Tech Mahindra's Ebit (earnings before interest and tax) margins to be flat sequentially on account of lack of headwinds due to wage increments. Among Tier-I, IT companies apart from TechM have implemented wage hikes.

Analysts at KIE believe that TechM is running a risk by deferring wage revision at a time when demand for talent is heating up and hence believes that attrition rate is a key metric to watch out for.

Phillip Capital expects a 20 bps QoQ decline in Ebit margin at 15.7 per cent in the March quarter as against 15.9 per cent in the December quarter. On a YoY basis, meanwhile, margins could expand by 570 bps from 10 per cent posted in  the same quarter last year.

JM Financial expects a 10 bps QoQ and 600 bps YoY expansion in margin at 16 per cent.  

Expect stable Ebit margins given seasonal strength in Comviva and lack of apparent margin headwinds, said analysts at KIE who see Q4 Ebit margin at 15.8 per cent, a contraction of 10 bps QoQ. 



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