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Tech Mahindra’s first-quarter profit down 39% on weak demand

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

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

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

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

India’s top two IT firms, Tata Consultancy Services (TCS.NS) and Infosys (INFY.NS) 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% 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% to 131.59 billion rupees, but missed analyst estimates of 134.95 billion rupees.

The company’s earnings before interest and tax (EBIT) margin fell to 6.8% from 11% a year ago, due to a 9.4% 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% ahead of the results. It was the worst-performing stock among IT peers, with a drop of 1.40% since bigger rival TCS announced results on July 12. Reuters

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