Tech Mahindra Reports Decline in Q2 Net Profit Amid Rising Costs
Tech Mahindra, a prominent player in the Indian IT services sector and a subsidiary of the Mahindra Group, has announced a 4.5% year-on-year decline in net profit for the second quarter of the fiscal year. The company attributed this downturn to increased employee expenses and the absence of one-time gains that had bolstered its previous year’s performance. However, on a sequential basis, Tech Mahindra’s profit saw a modest increase of 4.7% compared to the preceding quarter.
Financial Overview
For the quarter ending September 30, Tech Mahindra reported a net profit of ₹1,195 crore. This figure is notably lower than the same period last year, which benefited from exceptional gains from land sales. Despite the profit decline, the company’s revenue showed resilience, rising by 4.8% year-on-year and 5.1% quarter-on-quarter to reach ₹13,995 crore. This growth was primarily driven by robust performance in the banking, financial services, and insurance (BFSI) sectors, alongside stability in manufacturing, retail, logistics, and transport.
Sector Performance
Mohit Joshi, the Chief Executive Officer and Managing Director of Tech Mahindra, highlighted the mixed performance across different sectors. The communications vertical, which constitutes a significant portion of the company’s revenue, experienced a slight decline of 2.2% year-on-year. However, Joshi noted that this segment remains stable, with the largest plant achieving growth above the company average during the quarter.
Joshi expressed cautious optimism regarding the macroeconomic environment, stating, “While we see some signs of stabilization, the overall landscape remains fragile. A V-shaped recovery in spending seems unlikely, but we are hopeful for growth in the latter half of the year.”
Currency Impact and Regional Insights
In constant currency terms, which accounts for fluctuations in exchange rates, Tech Mahindra’s revenue grew by 1.6% from the previous quarter, marking the strongest sequential growth in a decade. The United States, which contributes approximately half of the company’s revenue, saw a 2.7% decline year-on-year; however, it rebounded with a 2.6% growth sequentially. Conversely, revenue from Europe increased by 5.5% compared to the previous year but experienced a slight decline of 1.2% quarter-on-quarter.
Caution in Automotive Sector
Despite the overall positive outlook, Joshi expressed caution regarding the commercial automotive segment, which continues to face challenges. He noted that while the passenger vehicle segment is showing early signs of stabilization, the broader automotive market remains under pressure.
Stock Market Reaction and Dividends
Prior to the earnings announcement, Tech Mahindra’s shares rose by 1.2%, closing at ₹1,468.15 on the Bombay Stock Exchange (BSE), even as the Sensex index ended the day approximately 0.4% lower. In a move to reward shareholders, the company’s board declared an interim dividend of ₹15 per equity share, scheduled for distribution on November 12.
Deal Wins and Operational Efficiency
In terms of new business, Tech Mahindra reported a significant increase in deal wins, which surged by 57% on a last-twelve-month basis to $3.2 billion, up from $2.9 billion. For the quarter, deal wins remained relatively flat at $816 million, slightly up from $809 million in the previous quarter but significantly higher than the $603 million recorded a year earlier.
The company’s operating margin improved to 12.1%, a notable increase from 11.1% in the June quarter and 9.6% in the same quarter last year. This marks the eighth consecutive quarter of margin expansion, attributed to enhanced productivity initiatives under the company’s margin improvement program, Project Fortius. Chief Financial Officer Rohit Anand explained that various strategies, including fixed-price projects and cost savings from selling, general, and administrative expenses, contributed to this improvement.
Workforce Dynamics
Tech Mahindra’s workforce dynamics also reflect the company’s current operational strategy. The headcount increased by 4,197 from the previous quarter, bringing the total to 152,714 employees. However, the workforce has decreased by 1,559 year-on-year, with the IT segment alone seeing a reduction of 1,459 quarter-on-quarter and 2,090 year-on-year. Joshi indicated that the recent headcount increase is largely seasonal, although attrition rates have slightly risen to 12.8% from 12.6% in the previous quarter.
Conclusion
Tech Mahindra’s latest financial results illustrate the complexities of navigating a challenging economic landscape. While the company faces headwinds from rising employee costs and sector-specific challenges, its ability to maintain revenue growth and improve operational margins demonstrates resilience. As the IT services sector continues to evolve, Tech Mahindra’s strategic focus on stability and cautious optimism may position it well for future growth, particularly in the second half of the fiscal year.
