Tech Mahindra hosted a conference call on July 25,2022. In the conference call the company was represented by Mr C P Gurnani-CEO, Mr Rohit Anand -CFO and Mr Vivek Agarwal, President-BFSI, HLS and corporate Development.

Key takeaways of the call

Revenues in US $ terms stood at 1632 million; up 1.5% QOQ and 3.5% in constant currency terms. On a yearly basis, the reported growth in dollar revenues stood at 18% while the yearly growth in constant currency was 21.2%.

In rupee terms revenue stood at Rs 12708 cr up 4.9% QoQ and 24.6% YoY.

By business verticals, CME (Communication, Media and Entertainment) grew 19.1% YoY, which contributes 40% of the revenues. Manufacturing which contributes 15.3% of the total revenue grew 8.9% YoY. Technology vertical grew by 30.3% YoY. BFSI; retail, transport and logistics and others contributed 16.7%, 7.9% and 10% to the quarterly revenues while registering healthy double-digit growth on yearly basis.

By geography America grew by 25.6% YoY and 4.4% QoQ while Europe grew by 10.7% YoY and declined by 1.9% QoQ.

Margin: EBIT margin stood at 11% down 220 bps QoQ.

Margin walk through quarter on quarter is as follows: Tailwind of 50 bps due to increase in pricing was offset by increase in salaries and subcontract cost to the tune of 100 bps, impact due to higher visa and seasonality to the tune of 80 bps and increase in SGA due to normalization to the tune of 100 bps.

SGA was higher when compared to last quarter as there was 1 time gain in Q4FY2022 and this quarter there was provision to the tune of US $ 6 million.

The company says that the Margin reported in Q1FY2023 is the bottom and expects that it will increase by 100-150 basis points every quarter and expects to reach an EBIT margin of 14% in the fourth quarter of FY2023.

The company will increase the employee annual compensation with effect from Q2FY2023 and will have an impact to the tune of 100 bps on margins which will be offset by increase in pricing and efficiency.

Levers for margin improvement: Improvement in operating efficiency due to increased utilization; there is a gap of 8-10% in offshore revenue when compared to the company's peer set and the company plans to increase the same; one time cost due to deal transition which will not be present in Q2 will all add to margin improvement going forward. Also, decrease in subcontracting cost will add to margin improvement.

Improvement in pricing momentum will continue in Q2 however in second half of FY2023 will depend on macroeconomic condition.

Amortization charges: At legal entity level, the amortization cost might be higher, but on a consolidated level it will not be that high.

Human Resource:

Attrition declined in Q1FY2023 and stood at 22% when compared to 24% in Q4FY2022.

The company added 6862 new hires in Q1FY2023. The company plans to hire around 10000 freshers in FY2023.

The supply bases which the company has added in tier II and tier III cities will come up in speed and the attrition rates in these cities will be lower.

Utilization levels stood at 83% in Q1FY2023.

Deal Wins: The TCV (Total Contract Value) of deal wind during the quarter was US $ 805 million. Of the total deal won Communications, media and entertainment segment won US $ 165 million worth deals and the enterprise segment got the remaining US $ 650 million worth of deals.

Pipe line and deal wins remain healthy and strong. There is general concerns about economic headwinds. However, the out look has not changed when compared to last 3 to 6 months. Large deal pipeline continues. Deals across cloud, engineering, connectivity and customer experience is good. Many of the company's customers are spending money on technology despite existing headwinds like inflation, economic slowdown and supply chain challenges.

A few of the big European clients saw revenue impact due o foreign currency fluctuations.

Clients: Client mining was strong across category. The company added 1 client in US $ 50 million + category, 9 clients in US $ 20 million + category, 18 client in US $ 10 million plus client, 8 client in US $ 5 million + category and 83 clients in US $ 1 million + category on a yoy basis. Total active clients stood at 1262 at the end of Q1FY2023.

Out-Look:

In FY2023, the company will focus on organic growth with bringing back profitability on track coupled with industry leading growth. The company will focus on integrating the mergers and acquisitions done earlier.

Sustainable level of EBIT margins for the company is 14% with a positive bias in the long run.

Management commentary:

Commenting on the performance Mr G P Gurnani, MD & CEO said: We ore starting this fiscal with a renewed commitment towards delivering consistent organic growth. We remain resilient and watchful given the dynamic global macro-economic environment and will continue to invest in new and emerging technologies to deliver differentiated offerings. Our winning strategy rests on the pillars — ‘Purpose, People and Performance' which is aiding us to responsibly capitalize on the strong demand environment in the market”

Commenting on the performance Mr Rohit Anand, CFO said: “Delivery transformation, cost optimization and cash conversion will be key focus areas, as we continue to offset the strong supply side headwinds in the market. We aim to expand our profitability through operational excellence and improved operating metrics over the course of FY'23.