Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

Qualitative Analysis of Annual

Report Of

Tech Mahindra Ltd.

Assignment - 3

MANAC: GMP 2014-15

Prepared by:

Bhupathireddy Oruganti
Niladri Sekhar Sarkar
Pulasta Mahapatra
Sudip Bose
Soham Ghosh
Utsab Chakraborty
Sl.

(G14014)
(G14031)
(G14037)
(G14053)
(G14051)
(G14057)

Item Description

Page

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

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FY11: Executive Summary

FY11: Analysis of current growth trend and future outlook
FY11: Analysis of current set of risks and future risk probability
FY11: Analysis of current Industry Environment and future
outlook
FY11: Analysis of current profitability and future profitability
drivers
FY12: Executive Summary
FY12: Analysis of current growth trend and future outlook
FY12: Analysis of current set of risks and future risk probability
FY12: Analysis of current Industry Environment and future
outlook
FY12: Analysis of current profitability and future profitability
drivers
FY13: Executive Summary
FY13: Analysis of current growth trend and future outlook
FY13: Analysis of current set of risks and future risk probability
FY13: Analysis of current Industry Environment and future
outlook
FY13: Analysis of current profitability and future profitability
drivers
Prediction for FY14 on Growth, risk, industry and profitability
fronts

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Table of Contents:

2010-2011

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

Executive summary:

Global recession and reduced IT spending has

taken a toll on companys revenue. To offset that, it has taken several

steps to reduce operating expenses. The company is also trying to reduce
its dependency on developed markets and concentrating on emerging
markets especially on vertical domain consultancy through superior
technology. Considering the upward industry trends and signs of economic
recovery, the company is expected to show better profitability. Being an
Indian company, it is also better placed to tap the opportunities as it is
predicted that India is going to contribute highest in the working
population. But, the company may be exposed to liabilities in case of any
adverse outcome due to pending litigation, any undetected financial
irregularities and the negative sentiment associated with the erstwhile
Satyam computers.
Growth:
1) Lower revenue is observed in 2010-11 compared to previous year. This
is because majority of the services revenue comes from US and Europe
market. Though subsequent to recession in 2008-09 there was a
positive GDP growth in 2010, but tough economic situation led to
reduced over-all IT spending in these markets. This led to lower service
revenue.
2) After positive GDP growth in 2010, US is expected to register a stable
GDP growth in 2011. As a result of that company should be able to
show greater profitability in 2011.
3) The company envisages growth opportunities in cloud computing and
SaaS (software as a service) business. To tap the market, the company
is already developing products and services with established vendors in
the related areas.
4) Company is also looking for high end services-consulting, systemintegration and it is also planning to create IPR with R&D sector and
academic institutions for future benefit to the customer, leading to
growth.
5) Major growth drivers in the near future will be from domain expertise
such as retail (virtual dealership solution for creating unique retail

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

experience), utilities (smart grid GIS based automatic metering for

infrastructure,

IT

based

video

security

analysis),

manufacturing

(mechatronics in auto-motive industry, technical consultancy in aero

space) and BFSI.
6) The company realizes the opportunities in emerging markets. The
company has heavily invested in R&D in order to develop low cost
solutions customized for emerging markets. The company is expected
to be in a better stride to tap the opportunities in emerging markets.

Risk:
1) As the companys balance sheet carried inflated balance in cash and
bank balance, non-existent accrued interest etc. on Jan2009, the
Company may be exposed to liabilities in case of any adverse outcome
of investigations of these.
2) The company also runs the risk of unidentified Risk of financial
irregularities in view of the significant limitations in investigation there
is a risk that material errors, fraud and other illegal acts may exist that
remain undetected.
3) The companys business is heavily dependent on US and European
market. Any economic slowdown or adverse legislation might impact
revenue.
4) It is always a challenge to keep pace with rapid technological
development.
5) Negative sentiment associated with erstwhile Satyam computer brand
may have an adverse impact on the future business growth.
6) As IT industry operates across many countries, non compliance to the
legal mechanism of the foreign countries may affect business.
Industry:
1) NASSCOM predicts that Indian IT / ITES industry may grow to USD 225
billion by 2020. According to the NASSCOM Strategic Review 2011, the
Indian IT / ITES industry is estimated to aggregate revenues of USD
88.2 billion in FY2011.
4

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

2) The opportunity in IT industry lies with emerging markets as it is

expected to provide better return in spending compared to developed
markets.
3) The domestic IT / ITES revenues are also estimated to grow at 21
percent to USD 28.8 billion in FY2011.
4) India is projected to contribute the largest number of people to the
working population over the next 10 years, a factor that favours
Mahindra Satyams Right Sourcing TM model for delivery of services.
5) Due to fragmented nature of IT industry where several Indian and
global companies are competing each other, it is very difficult to
differentiate products and services leading to low margin.
Profitability:
1) One of the important drivers of profitability is the tax incentives given
to the STPs (Software Technology Park) which is valid for 10 years since
inception and so it is sustainable in the short to medium term.
2) Income from operation has decreased compared that of the previous
year by around 6.5%, yet the operating profit has increased by 25%.
The increase in profit is due to increase in other income. The increase
in other income is on account of foreign exchange gain, hence it cannot
be deemed as sustainable in the long run.
3) The operating expense has increased by 16% and this increase is
primarily due to outsourcing in customer deployment and legal affairs.
Considering the legal cases pending and similar business environment,
it is unlikely that the operating expenditure will decrease in future. This
will have negative impact on profitability in near future.
4) The company has taken various green initiatives

by

effective

management of energy, water, paper and travel. With these initiatives

company expects to reduce their operating expenses.

2011-2012

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

Executive Summary: Growth is driven by increased exports for the

current year. The companys robust growth expectation in the coming
years is strong founded due to increased demand in newer sectors and
newer segments of the market. To grab the opportunity, the company has
invested in R&D, new product development and increasing domain
expertise. Probable risks may arise from changing legislation in foreign
markets, economic slow-down in US & Europe, undetected financial
irregularities from erstwhile Satyam Computers etc. The profitability of the
company in the near to mid-term future may get affected due to a
probable adverse outcome of the sub-judice court cases. The company will
be able to sustain the profitability in bullish industry outlook only if it can
keep pace with technology to extract a higher margin from the customer.
The profitability achieved in the current year is not sustainable as a
significant portion is from other income. The short term profitability may
get affected due to the tax incentive period and increased spending on
legal affairs. This may be compensated though to certain extent by the
gains from different green initiatives.

Growth:
1. The revenue for 2011-2012 has increased by approx. 25 % w.r.t the
previous year. The increase in Revenue is mainly contributed by
Business Operations. Besides, there is a substantial contribution from
the interest on the Bank Deposits.
2. The growth in revenue may be attributed to the substantial increase in
Indian Exports which stands at 25% as on FY-2012, compared to less

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

than 4% in FY-1998. Besides this the IT-BPO industry recovered from

uncertainties in the Global Business Environment.
3. The company will invest in global delivery centres to serve the
customers better and to provide variety of resources and expertise
across the globe to those companies which will not have presence in
these emerging economies.
4. The company envisages growth opportunities in Technology, Media &
Entertainment and semiconductors, enterprise business solution, cloud
computing and SaaS (software as a service) business. To tap the
market, the company is developing products and services with
established vendors.
5. Major growth drivers in the near future will be from domain expertise
such as BFSI, US and large corporations and emerging segments such
as retail, healthcare and utilities, SMBs, Asia Pacific and Rest of the
World.
6. The company realizes the opportunities in emerging markets. The
company has heavily invested in R&D in order to develop low cost
solutions customized for emerging markets. The company is expected
to be in a better stride to tap the opportunities in emerging markets.
7. Company is also looking for high end services-consulting, systemintegration and it is also planning to create IPR with R&D sector and
academic institutions for future benefit to the customer, leading to
growth.

Risk:
1. As the Consumer demand & spending in the emerging economies
increases, the companies will have a wider variety of geographic
locations which will in turn spread the risk of outsourcing.
2. Appropriate contingencies are being earmarked against regulatory noncompliances/breaches faced by the company, besides other various
claims.
3. The company contemplates that it is would be very tough to keep pace
with the rapid technological development.

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

4. The company also runs the risk of unidentified Risk of financial

irregularities in view of the significant limitations in investigation there
is a risk that material errors, fraud and other illegal acts may exist that
remain undetected.
5. As the company is spreading its operations in many countries, it faces
risk of non-companies of any sudden change in the regulatory
requirement.
6. The company envisages high attrition due to attractive foreign
opportunities.
7. The companys business is heavily dependent on US and European
market. Any economic slowdown or adverse legislation might impact
the revenue.
8. Delay in completion of fixed-price, fixed-time frame contracts within
the budgeted time & cost.
Industry:
1. According to NASSCOMs strategic report on 2011-2012, Indian IT/ITES
Industry is the fastest growing segment and is increasing by 19% and
estimated growth to$ 40 Billion in 2012.
2. The opportunity in IT industry lies with emerging markets as it is
expected to provide better return in spending compared to developed
markets.
3. According to UN, the developing economies are growing thrice as fast
as to that of developed economies leading to a better economic
environment. The return of consumer confidence and recovery of
business growth are expected to drive IT/ITES spending towards
moving forward.
4. Due to fragmented nature of IT industry where several Indian and
global companies are competing each other, it is very difficult to
differentiate products and services leading to low margin.

Profitability:

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

1. Income from operation has increased compared that of the previous

year by around 25%, yet the operating profit has increased by approx.
95%. The increase in profit is due to increase in income from
Operations. The increase in other income is on account of foreign
exchange gain, hence it cannot be deemed as sustainable in the long
run.
2. Also, one of the important factors of driving profit is the tax incentives
given to the STPs (Software Technology Park) which is valid for 10 years
since inception and so it is sustainable in the short term only.
3. The operating expense has increased by 32% and this increase is
primarily due to outsourcing in customer deployment and legal affairs.
Considering the legal cases pending and similar business environment,
it is unlikely that the operating expenditure will decrease in future. This
will have negative impact on profitability in near future.
4. The company has taken various green initiatives

by

effective

management of energy, water, paper and travel. With these initiatives

company expects to reduce their operating expenses.

2012-13
Executive summary: The Company is on a growth path and is expected
to grow because of many factors namely its leadership position as a
service

provider

to

telecom

sectors,

better

economic

scenario,

geographically diversified business portfolio, focus on new technology and

R&D and strategic acquisitions for capability augmentation. To continue on
the growth path the company need to guard against certain risks namely
fluctuation in foreign exchange-rate, increased domestic competition from
global IT giants, the probable reduction in revenue due to the imminent
US Immigration Bill, fast changing technology etc. On the profitability
front, PAT growth is not commensurate with the revenue growth. Though
TML is having a competitive advantage in the Industry due to its leading

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

position as service provider to Telecom Sector and advanced technology,

the revenue growth rate may be subdued due to fluctuating economy and
lower deal size by the clients due to budgetary constraints.

GROWTH:
1) Revenue from operation has increased by 25% compared to the
previous year. This is because of better economic condition, more IT
spending and better marketing effort. Revenue from IT consulting has
also increased.
2) Among the Indian IT companies, TML is a market leader in telecom
industry. It serves segments such as Telecom service providers,
Telecom equipment manufacturers and Independent software vendors.
As the emerging economies invest more in telecom sector, the leading
position in this sector is a major growth driver for the company. The
company is able to add lot of new customers in this domain in the
current year.
3) The company's acquisition of Hutchison Global Services and Comviva
gives it competitive advantage in CRM and in M-commerce segment.
4) The geographical split of revenue is balanced with 45% share from
Europe, 33% from America and 22.8% from rest of the world. This
means the company has been able to reduce its dependency on US
markets and has focussed more in Europe and emerging markets. This
leaves company less susceptible to US economy but more towards
European economy.
5) The company is investing in new technologies like smart computing
products, cloud, analytics and mobility. That means it anticipates
growths in these areas. Its earlier investment in R&D has earned it a
niche position in telecom software service provider.
6) The company's merger with Satyam will reduce the customer
concentration and will help it to reduce risk.
RISK:
1) The acquisitions by nature involve risks relating to failure to achieve
strategic objectives, cultural and financial integration etc.
10

Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

2) The exchange rate between the Indian rupee and the British pound and
the rupee and the U.S. dollar has fluctuated widely in last year and
may continue to fluctuate significantly in the future.
3) Any strengthening of the Indian rupee against the British pound, the
U.S. dollar or other foreign currencies, as witnessed in the last year,
could adversely affect our profitability.
4) Global IT giants, as they are expanding their business in India, may
pose a threat to the company due to their better domain knowledge
and customer relationship and higher revenue base.
5) The immigration bill which may come into effect soon will have a
negative impact on Indian offshore Vendors like TML. Outplacement
Provision in the Immigration Bill the new H1/L1 visa holders cannot
work at client site. The implementation of this bill will increase cost of
delivery in US.
6) Constantly changing

technology

markets

and

volatile

economic

situation is making the clients face the twin challenges of optimizing IT

costs and investing in future technologies. So, Mahindra Satyam in one
hand has to develop solutions using newer technologies, and on the
other hand has to reduce the pricing to attract customers. This puts
immense pressure on companys profitability.
7) The profitability of the company is largely dependent on telecom
sector. Cautious spending in the sector could impact the profitability of
the company.
PROFITABILITY:
1) The operating profit has increased by 20.5% compared to the previous
year. The increase is primarily driven by revenue growth, cost
efficiencies and rupee depreciation. It seems that the cost effective
measures that the company took in last few years has started to give
benefit.
2) The consolidated

Profit

before

Interest,

Depreciation,

Tax

and

Exceptional items increased by more than 1% compared to previous

year. This improvement in operating profits was driven by revenue
growth and cost efficiencies.
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Qualitative Analysis: Annual Report of Tech Mahindra Ltd.

3) For Mahindra Satyam, though revenue increased by more than 20%,

PAT margins reduced from by more than 5% Largely due to greater
provision for tax and higher exceptional items.

INDUSTRY:
1. On IT spend trend, the budgetary tightening has led to smaller deal
sizes and reduction in certain existing business line and market
segments. This is clearly an industry-wise trend which is bound to
impact the profitability of the company.
2. New technologies, new business models, new smart phones and
increasing

data

usage

have

increased

the

telecom

industrys

dependence on IT. And with creasing competition, investment is going

to increase in the coming years. Tech Mahindra being would be one of
the largest Telecom software services company in India, TML is better
placed.
3. Due to fluctuating economic conditions, client budgets have been
under pressure which led to small deals, of lesser duration. Rapid
growth in revenue is not likely in the future.
Prediction for 2013-14: Consistently higher revenue growth coming
from new businesses supported by companys multi-pronged initiatives to
keep pace with the ever evolving technology. Due to the focus on building
domain expertise there is a probability of improvement in PAT/employee.
As the company is constantly on the look-out for newer sectors, newer
markets and the increasing trend of smaller deal size by the clients there
is a probability of increase in no of customers. A big liability can be
expected in terms of compensation against claim settlement for different
pending legal cases. The industry is on a growth path fuelled by spending
from US and Europe and improving economic scenarios in markets where
TML operates. The initiatives taken by the company to keep pace with the
newer technologies are going to stand in good stead in terms of revenue
generation.

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