India’s Tech Mahindra misses Q3 profit view on muted spending in key segments

MUMBAI/BENGALURU (Reuters) -India’s Tech Mahindra posted a 60.6% drop in third-quarter net profit on Wednesday, missing estimates as clients continued to hold back spending in communications and banking segments.

The fifth-largest Indian IT services company’s net profit fell to 5.10 billion rupees ($61.36 million) for the three months ended Dec. 31, 2023, from 12.97 billion rupees a year earlier.

Analysts, on average, expected a profit of 6.17 billion rupees, according to LSEG data.

In the first quarter after Mohit Joshi took over as the chief executive officer, the company reported a revenue of 131.01 billion rupees, compared with analysts’ estimates of 128 billion rupees.

Operating margins fell 660 bps to 5.4% from the same period last year, while new deal wins more than halved to $381 million from $795 million.

India’s $245-billion IT industry has been hurting due to an uncertain demand environment as clients cut back on spending amid inflation and recession fears.

Tech Mahindra’s growth was hit due to a weakness in the communications, media and entertainment vertical, its largest in terms of revenue, which dropped 13.4%.

The company has been trying to exit non-core, low-margin businesses to improve profitability for the past few quarters.

Joshi said the outcome was “mixed” for the quarter, with growth in the manufacturing and healthcare segments, but spending remained muted in areas like communications, BFSI and hi-tech.

“These segments were impacted by furloughs … we may continue to see some impact in hi-tech and Australia (business) in Q4 too.”

Tech Mahindra’s peers reported mixed numbers, but the commentary largely indicated that the demand environment has not worsened sequentially, as was feared.

Elara Capital analyst Ruchi Burde Mukhija said revenue and margin were a “surprising” beat, but deal wins were weak.

“We reckon this quarter to be the one to mark the turnaround in Joshi’s regime,” she added.The company’s shares closed 3.02% higher ahead of the results.

($1 = 83.1120 Indian rupees)

(Reporting by Haripriya Suresh and Sai Ishwarbharath B; Editing by Sohini Goswami)