Tech Mahindra reports one of its biggest-ever profit declines

Tech Mahindra, the last of the six large-cap bigwigs in the domestic information technology (IT) services industry, reported a staggering 62% drop in net profit in its September quarter earnings, rounding off what has been one of the worst quarters for this industry in the past five years barring the pandemic-disrupted periods. Revenue for the period closed at $1.55 billion—down 2.8% sequentially in constant currency terms, while net profit closed at $59.5 million—down 29.3% sequentially and a whopping 62.5% year-on-year (YoY).

Operating margin for Tech Mahindra contracted by 2.1 percentage points sequentially to 4.7%—one of its lowest in recent memory.

Tech Mahindra failed to meet Street expectations with its September quarter earnings, which were even weaker than its peers through this weak fiscal for all firms. An average of 29 analysts polled by Bloomberg expected revenue for the firm to be at $1.59 billion for the quarter, while net profit, as per 26 analysts polled by Bloomberg, was expected to be at $96.1 million. The latter, in fact, was lower by more than a third of the expected profitability of the company.

Tech Mahindra’s September quarter for this fiscal was one of the weakest in its history, and comes at a time of significant change for its top management. Long-standing chief executive and industry veteran, CP Gurnani, is expected to step down from his role for retirement and hand the reins over to Mohit Joshi—who was one of the two presidents at cross-industry rival, Infosys, as part of a 22-year stint. Joshi’s ex-Infosys colleague, Atul Soneja, also joined Tech Mahindra as its chief operating officer on 7 August.

The September quarter was the last full quarter for Gurnani as Tech Mahindra’s chief, with Joshi set to take over from 19 December. Speaking at its post-earnings press conference, the veteran executive said, “For the second half of the year, our deal pipeline is very strong. There could be reasons for long closures of deals, but that’s the nature of the business. I’d have loved to finish strong—this is the last quarter where I’m at the front seat. I’m mighty proud of what we have achieved since we went public in 2016. At the same time, I do know that this quarter, I’m reporting a negative growth rate and drop in margins. But, I’m confident about the future despite this decline.”

Touching upon the steep profitability decline, Gurnani said, “We’ve also decided to take a lot of extraordinary items that are indicative of difficult markets and contracts, and we’re working on trying to either close them—for which we’re having open dialogue with our auditors. But, I believe in what we’re doing, and Mohit and Rohit (Anand, chief financial officer) will continue to build on strong foundations, and continue to improve from where we are.”

Breaking down the drop in its profitability decline, Anand said, “We’re prioritizing our core business, for which we’ve taken a look at product lines where we don’t have strategic leverage for the future. We’ve terminated those contracts and stopped taking new businesses there. This created exceptional items for this quarter, thus taking an impact on our revenue, profit and margin. Post-adjustment for that, the decline in our operating margin would be 140 basis points (bps).”

One basis point is one-hundredth of one percentage point.

The exceptional items, Anand explained, included “one-time actions” by Tech Mahindra to revise its “geographies, service lines and contract prioritizations.” He further said that this prioritization of business avenues will continue through the rest of this fiscal, hinting at further profitability declines for the company—unless revenue and growth opportunities improve later this year.

Tech Mahindra reported the total value of net new deal wins at $640 million for the quarter—down by over 10% from the year-ago period, but a significant 78% better than the June quarter. Despite this, both Gurnani and Anand said that deal closing times remain a key challenge due to macroeconomic headwinds and boardroom uncertainty over discretionary tech spending among clients.

This could leave Tech Mahindra staring at one of its weakest fiscals in the past five years, a senior analyst at a Mumbai-based brokerage firm told Mint on condition of anonymity. The numbers come in one of the sector’s worst quarters of late, with analysts pointing out a failure to control inflation by the US Federal Reserve as a key reason for recovery in the IT sector taking longer than just this fiscal.

CEO-designate Joshi added that Tech Mahindra has made an offer for a new chief marketing officer, who would be joining “in the next few months.”

“We’re also looking to hire a new CHRO, and have done leadership hiring for financial services businesses in Kenya and the US, which are significant roles and will help us in our new organizational structure in the future,” Joshi said.

Tech Mahindra reported a total headcount of 150,604 for the quarter—up 1.6% sequentially but an 8.1% YoY drop. Attrition, however, declined to 11%—one of the lowest reported figures across the industry this quarter.