Lack of large deals, attrition may hit Tech Mahindra's profitability

Tech Mahindra's performance in the quarter to December shows a sustained momentum in dollar denominated revenue and operating profit. Though this is encouraging, considering a seasonally dull quarter due to holidays and the annual practice by clients to rejig information technology budgets, the trend in winning large accounts and employee attrition raise concerns.

These factors may hamper growth in the coming quarters if not addressed swiftly. The 4.4% topline growth in dollar denominated revenue is in line with the performance of some of its bigger peers. In addition, operating profit growth of 4.3% shows that the company was able to retain operating margin. On the rupee front, the lack of support from the currency was apparent.

Revenue rose by a modest 2.7% to Rs 4,898.5 crore. Operating profit grew by 2.3% to Rs 1,136.3 crore. What could be of concern is the company's client profile. The number of active clients increased to 605 from 576 a quarter ago. However, a majority of the addition took place in the $1 million billing category. The number of clients in the large deal segment, which includes category above $20 million remained more or less stagnant. Tech Mahindra's bigger peers have been showing a healthy growth in the number of large clients as some of the old contracts come for renewal.
For instance, TCS added over 29 clients in the $20 million and above segment in the past year; Infosys added over 35 whereas Wipro added 10 clients in this category.

The contrasting trend suggests that Tech Mahindra may be finding it difficult to convert larger deals into wins amidst tough competition. If the sluggish trend in Tech Mahindra's large client number continues, it may hamper its growth and profitability in the coming quarters. A firm trend in employee attrition is another concern. Attrition has stayed above 15% over the past seven quarters.

Tech Mahindra’s stock has gained over 16% in the past three months after considering the fall of 6.5% in the past two weeks. At the closing price of . 1,769.5 on Tuesday, it traded at a trailing P/E of 13.5. While the valuation looks quite attractive when compared with P/Es of above 20 for some of the larger players, a sustained business growth momentum in the coming quarters will be crucial for a further increase in the P/E.