Tech Mahindra hosted a conference call on April 27,2023. In the conference call the company was represented by Mr C P Gurnani-CEO and Mr RohitAnand–CFO.

Key takeaways of the call

FY2023 was yet another year of double digit revenue growth. Large deal win stood at around US $ 2.9 billion.

The company’s Communication, Media and Entertainment (CM&E) despite challenges has continued to grow for the last 12 quarters in a row. On the Enterprise side, the company has touched a billion dollar quarterly run rate. This is on account of the technology investments and up-skilling investment which the company has made on quantum computing, Meta, on block-chain, cloud and customer experience management which are yielding good results.

Full Year FY2023:

Revenues for FY2023 grew by 13.7% YoY in Constant currency. Margins were under pressure; however, the investments which the company has made will lead to operating efficiency particularly on automation. The company believes that there is enough operating levers to drive margin.

Revenues for the year stood at US$ 6.6 billion. Communication business grew by 13.4% and Enterprise business grew by 13.9% YoY in CC terms. Within enterprise technology, retail, and manufacturing are the major growth drivers for the year.

EBIT margin for FY2023 came in at 11.4% when compared to 14.5% in FY2022.  Broadly 300 bps decline in EBIT was driven by headwinds due to wage inflation that the company saw on the supply side, more aggravated towards the first few quarters versus the last quarter, SGA travel costs with some of them normalization post COVID increasing year on year, some of the deal M&A related costs that the company had articulated before around 50 bps.Large deal ramp up initial cost to the tune of 70 bps. This was offset by pricing which contributed close to 100 bps, there was reduction in sub con cost to the tune of 80 bps and then the company continued to drive offshore and that has helped the company get benefit of 30 bps.

Q4FY2023:

Revenues for Q4FY2023 stood at US$ 1668 million marginally up when compared to Q3 in constant currency terms. CME vertical grew 1.8% QoQ on a cc basis and Enterprise vertical decreased by 0.7%.

In Rupee terms revenue in Q4 stood at Rs 13718 cr as against 13735 cr in Q3FY2023.

Margins: EBIT margin stood at 11.2% as against 12% in Q3. The reduction of 80 bps was largely contributed by currency impact of 60 bps and SGA factor of 90 bps. And these were offset by productivity actions that the company had articulated in the past that the company has been working on Subcontractor cost which gave the company a benefit of 70 bps.

The company had foreign exchange loss in Q4 when compared to gain in Q3. This was primarily due to one of impairment cost in Q4.

Effective Tax rate: Effective tax rate for the quarter stood at 26.2% in Q4 when compared to 27.4% in Q3. The company expects normalised tax rate to be in the range of 25-26% going forward.

Revenue decline with top 5 clients is more or less stabilising. The company says that it has witnessed majority of the impact and expects that things should improve from here on.

Levers for margin improvement include decline in sub con cost; large deal will get mature so there will be some reduction in cost; 4-5% improvement in offshore rates; pyramid rationalization and structured action to divest non-profitable and low profitable businesses.

Wage Hike: The company will continue the same strategy what it followed earlier with respect to wage hike. The company will stagger the wage hike in FY2024.

Order Book: The Company reported an order book for $592 million for the fourth quarter ended a decrease of 25.5%QoQ from $795 million; and 41.44% drop on a YoY basis. In Q4FY22, the company had reported $1 billion in deal wins.

Overall deal wins for full year FY2023 stood at $2.9 billion, a decrease from $3.28 billion in FY22.

Outlook:

The global economic outlook continues to be uncertain, the macro indicators and the actions of the monetary and regulatory authorities or policy decisions are impacting the decisions and are slowing on decision making. The clients of the company are cautious and company needs to be cautious.

However, the other way of looking at it is Tech Mahindra has never wasted a crisis. The company will double its investments in up-skilling and also double its investment in some of the practising markets like Japan, Middle East as the company believes its clients will eventually want to move to new platforms, would want to move away from legacy to digital. The economic downturn will force decision making particularly from legacy to digital.

The company believes that this phase is temporary and expects recovery to happen within FY2024.

The company is witnessing robust pipeline from where it was in FY2022. Also client conversation is strong and positive however ther is delay in decision making in discretionary spends.

The company expects one two quarters to be soft and pick in the second half in demand.

Pricing: The Company expects limited pricing improvement in FY2024.

Dividend: The board has approved final dividend of Rs 32 per equity share taking the total dividend for FY 23 to Rs 50 per share, which is an expansion of close to 11% from Rs 45 a share in FY2022.

Management commentary:

Commenting on the performance CP Gurnani, Managing Director & Chief Executive Officer, Tech Mahindra, said,“As we step into FY''''24, we see the increasing need for businesses to stay agile by leveraging next generation technologies. We are strongly focused on helping our customers stay competitively dominant and relevant in the era of fast evolving market conditions by helping them adapt to leaner and sustainable business models”