Tech Mahindra Q1 profit drops 39% as clients cut spending

Tech Mahindra on Wednesday posted a surprise 39 per cent drop in first-quarter profit, as challenging macroeconomic conditions prompted clients to curb spending.

The company's consolidated net profit fell to Rs 6.93 billion ($84.5 million) for the quarter ended June 30.

Analysts were expecting profit to remain flat at Rs 11.32 billion, according to Refinitiv data.

Information technology (IT) companies have seen clients tighten spending amid fears of a recession in key markets US and Europe, resulting in subdued results for the quarter and warnings of slower revenue growth for the year.

Uncertain demand environment approaching?

Tata Consultancy Services and Infosys have warned of an uncertain demand environment, with the latter halving its full-year revenue growth outlook.

Analysts have also flagged weakness in Tech Mahindra's largest segment, communications, which contributes nearly 40 per cent of its revenue as telecom clients ramp down on projects in a bid to cut costs.

The company's new deal wins fell to $359 million from $802 million a year ago.

"This quarter was a challenging one for us as revenue growth faced strong headwinds and that had an impact on profitability," Chief Financial Officer Rohit Anand said.

Revenue from operations rose 3.5 per cent to Rs 131.59 billion, but missed analyst estimates of Rs 134.95 billion.

The company's earnings before interest and tax (EBIT) margin fell to 6.8 per cent from 11 per cent a year ago, due to a 9.4 per cent rise in employee benefit expenses.

Analysts had expected a sharp contraction in the EBIT margin due to wage hikes.

Shares of Tech Mahindra closed down 1.15 per cent ahead of the results. It was the worst-performing stock among IT peers, with a drop of 1.40 per cent since bigger rival TCS announced results on July 12.