Tech Mahindra Leans on BT for Revenues

Like other top outsourcing firms, Tech Mahindra Ltd. reported strong earnings growth during the first fiscal quarter and is expressing caution over economic conditions. But its focus on Europe is shielding it somewhat from the effects of the U.S. slowdown.

Tech Mahindra reported a 52 percent growth in net profit during the fiscal first quarter to $62.5 million, on a 29 percent increase in revenues to $271.9 million. (See Tech Mahindra Reports Q1.)

In addition to benefiting from currency fluctuations, increased offshoring, and higher capacity utilization that led to improved margins, the company is focusing on the kind of "transformational" deals that customers look to in a difficult economy. (See Indian Outsourcers Proceed With Caution.)

Vineet Nayyar, vice chairman and CEO, told CNBC-TV18 following the results announcement that "macroeconomic conditions are tough and the overall outlook is somber. We made sure that we enter into long-term contracts, which will insure us from the changes and ups and downs of various economies and business needs. That is what is sustaining us through this period."

The company has an advantage over other outsourcing firms in its revenue mix. While the U.S. accounts for more than 60 percent of Indian software and services revenues, 22 percent of Tech Mahindra's revenues come from the U.S., whereas 72 percent come from Europe, with the remaining 6 percent from the rest of the world.

A research note issued by Mumbai-based brokerage firm Prabhudas Lilladher Pvt. Ltd maintains an outperform rating on Tech Mahindra, stating: "Sitting on a robust order book from BT and minimal exposure to U.S., TechM appears well positioned to deliver steady growth at a time when peer group is facing headwinds."

Tech Mahindra, formerly Mahindra-British Telecom, still derives the majority of its business from U.K. incumbent BT Group plc (NYSE: BT; London: BTA), which holds a minority stake in the company. The two announced yesterday they have signed a new $700 million contract for a five-year "systems and process transformation" program. (See Tech Mahindra Wins BT Deal.)

In March Tech Mahindra signed a five-year BSS/OSS deal with BT worth $350 million, following a $1 billion deal signed with BT Global Services in December 2006. (See Tech Mahindra Wins at BT and BT Picks Tech Mahindra.) That adds up to more than $2 billion in revenues from the carrier over the next five years.

Tech Mahindra has been working to diversify its revenues away from BT, which accounts for 62 percent of its revenues, and has seen a 14 percent quarter-on-quarter growth in revenues from other clients. The company did experience a growth in revenues from its U.S. business, which includes AT&T Inc. (NYSE: T), during the quarter.

The company is also deriving more of its revenues from non-telco customers: Prabhudas Lilladher notes that "the dominant Telecom Service Provider vertical dipped below the 90% revenue contribution mark for the first time at 87.7%."

Prabhudas Lilladher expects the company "to report earnings growth of 36.3% and 19.4% in FY09 and FY10 respectively," compared with the 16.9 percent growth reported for the financial year ended March 2008.

Tech Mahindra's stock climbed INR65.55 (9.65%) to close at INR744.65 on the Bombay Stock Exchange on Tuesday.

— Nicole Willing, Reporter, Light Reading

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