Tech Mahindra: Recovery in telecom spending bodes well; stock up

The country's fifth-largest software exporter Tech Mahindra, continued its earlier subdued performance even during the March 2011 quarter.

While the company managed a marginal revenue growth during the quarter, compared with earlier quarters, the growth in bottomline remained more or less flat.

At 9:42 am, shares of Tech Mahindra were trading 0.21 per cent up at Rs 660 on the Bombay Stock Exchange . It hit a low of Rs 587.15 nad a high of Rs 664.30 in trade so far.

The company's growth has remained restricted over the past few quarters due to turbulence in the global telecom sector, which contributes a major chunk of the company's overall business.

Also, the performance of the company's largest customer - British Telecom , which contributes over 40% to the overall business, has remained unstable in the past.

Facing these challenges, the slight increase in discretionary spends globally comes as a positive for the company. While demand from the the US and Europe continue to remain slow, emerging markets have shown healthy signs of demand revival.

To address the new technology initiatives such as cloud computing, Tech Mahindra has expanded its service offerings beyond applications to include infrastructure management, BPO, security, VAS & network services.

During the quarter, the company posted a 4.2% revenue growth atRs1,262 crore, against the previous quarter, driven largely by a 2.5% volume growth. On the operational front, increased selling, general and administrative expenses relative to net sales resulted in a more or less flat operating profit margin at 20.4%.

Wage hikes and pricing pressures in the coming quarters are likely to act as a headwind squeezing margins further. The company's bottomline also showed a flattish trend at Rs208 crore, on a sequential basis.

During the March 2011 quarter, the company's BT driven revenue stood at £70 million, which is expected to remain stagnant. However, non-BT revenues grew at 9% sequentially, showing signs of revival.

The company has witnessed an improved traction in its Africa business, where it is serving 2,000 clients across 7 countries. The Vodafone projects in Australia and Qatar, signed in the March quarter, bode well for the company. Tech Mahindra has witnessed increased demand from the emerging markets. This is evident from a significant employee addition of 4,125 during the quarter.

The stock is currently trading at 11.6 times its earnings for FY11. A strong traction is expected from emerging markets for the company in the coming quarters.

Also, the recovery in telecom spending and synergies from an ultimate merger with subsidiary Mahindra Satyam are positive signs for the company going ahead.