Tech Mahindra reports 40% YoY drop in net profit, calls Q1 its “toughest quarter” in five years

The company on Wednesday said first-quarter net profit stood at Rs 693 crore while revenue for the period grew 3.5% YoY to Rs 13,159 crore, both missing analysts’ estimates.

This comes at a time when industry peers too have reported a drop in first quarter numbers due to delay in decision-making and cut in discretionary spends, and have warned of short-term demand concerns.

On a sequential basis, profit was down 38% while revenue was down 4.1%.

According to an ET poll of analysts, YoY revenue growth was expected to be 7% while profit was expected to dip by 2%.

Chief executive officer CP Gurnani said the quarter was marked by large-scale slowdowns, particularly across communication clients.

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“This quarter is probably one of the toughest quarters I have seen in the last five years, but we believe that we will be able to bring back our growth trajectory,” Gurnani said, adding that the current challenges are “temporary”.The communications, media and entertainment (CME) vertical was down by 9.4% from the previous quarter and 8.2% from a year ago. The vertical accounts for about 38% of the revenue. “The fundamental reason is the communication sector pulled the brakes suddenly during the quarter and our costs were not aligned with it,” said Gurnani.

Gurnani said two or three projects were impacted by the funding winter in the startup sector, with some late-stage startup clients being impacted.

In the communications vertical, the company said discretionary spends and related-capital expenditure were held back by clients and they started focussing on operational expenses and efficiency instead.

Revenue from the banking and financial services vertical was down by 3.2% sequentially and 5.4% over the year.

Manufacturing, its third largest vertical, was up by 1.8% sequentially and 8.6% on year.

Revenue from Europe was down by 6.7% over the quarter, while that from the Americas was down by 0.5%. From the rest of the world it was down 8.2%.

In the previous quarter (Q4 of fiscal 2022-23), the company had warned that it expected the first half of the 2023-24 to remain muted due to weakness in Europe and currency headwinds.

Large new deal wins for the quarter stood at $359 million compared with $592 million in the previous quarter and $802 million a year ago.

Gurnani said conversation around cost transformation projects have increased; however, the deal closure timelines were getting extended.

The company’s operating margin stood at 6.8%, down by 440 basis points over the previous quarter and 420 bps from a year ago.

“On margins, there was half a percentage point impact of Comviva seasonality, 2 percentage point impact of the drop in services revenue–mainly from the CME vertical. There was a 200 basis point impact of an unusual one-time customer situation due to bankruptcy proceedings,” said Rohit Anand, chief financial officer, Tech Mahindra.

CEO designate Mohit Joshi, who will take over from Gurnani in December, said he has been meeting clients with Gurnani over the last month since he joined the company. The former Infosys executive said that most clients expect their long-term association with the company to continue.

“We have had a challenging set of results. But going forward, in the time that I’ve spent with the company, I’m very confident about our medium- and long-term opportunities,” said Joshi.

Gurnani said Joshi’s non-CME background will be essential to tiding through the current situation, as the company seeks to grow in sectors like BFSI.

On a constant currency basis, Tech Mahindra’s revenue was down by 4.2% over the quarter. In comparison, Wipro reported a 2.8% dip, HCLTech reported a 1.3% dip, Infosys saw 1% growth, and TCS’ numbers were flat.

Attrition for the quarter was down at 13% compared with 15% last quarter, with the company indicating an improvement in employee retention measures. Net headcount was down by 4,103 during the quarter, taking the total headcount to 148,297.

On Wednesday, Tech Mahindra’s shares closed 1% lower on the BSE at Rs 1,142. The results were announced after market hours.