Tech Mahindra hosted a conference call on Nov 01, 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

The company has remained focused on its core purpose. The company’s efforts on sustainability, equality, diversity has yielded very good results. Strategic focus on data, discipline, competencies and development of new technology has resulted in profitable growth.

In Q2FY2023 Revenues in US $ terms stood at 1638 million; up 0.3% QOQ and 11.2% YoY. Revenue growth stood at 2.9% QoQ  in constant currency terms. Growth was broad based.

In rupee terms revenue stood at Rs 13,129cr up 3.3% QoQ and 20.7% YoY.

By business verticals, CME (Communication, Media and Entertainment) grew 3.1% QoQ and 20%+YoY in CC terms and Enterprise grew 2.8% QoQ and 14.4% YoY in CC terms.

Hitech vertical has grown at a healthy rate in Q2FY2023. This is on account of the investment which the company has made both organically and inorganically. Also, due to better penetration on the existing customers. However the company has added less new customers. Also the company’s strategy with respect to hyperscalers has led to healthy growth.  The company expects the momentum to continue with more customer penetration.

By geography growth was broad based in Q2FY2023 with America growing  by18.4% YoY and 2.6% QoQ while Europe growing by 5.1% YoY and declined by 3.5% QoQ(however adjusted for currency has grown 3.5% QoQ) and rest of the world adjusted for currency has grown 3.4%.

Top 5 clients: Revenue contribution from top 5 clients has decline in Q2 on account of closure of couple of projects from time line perspective.

BPO segment continue to perform better in the last 6-7 quarters. This is on account of investments made by the company which has helped it to grow 5% QOQ for last few quarters. Growth in Q2FY2023 was on account of seasonality.

Team Agarwal’s focus on integrating acquisitions and driving synergy has resulted in the company delivering good results and good returns.

Margin: EBITDA margin stood at 15.1% up 30 bps QoQ. Focus on operating metrics despite salary hikes given led to improvement in margins.

EBIT margin for the quarter stood at 11.4% up 40 bps and 70 bps in constant currency QoQ.

Margin walk through quarter on quarter is as follows: Tailwind of 60 bps of due to increase in utilisation, discontinuation of low margin business leading to improvement in margin by 20 bps, SGA savings leading to margin improvement to the tune of 60 bps and pricing improvement resulting in margin improvement to the tune of 50 bps. This was offset by salary increases and inflation to the tune of 120 bps and currency headwinds to the tune of 30 bps.

The company expects to exit EBIT margin in Q4  at 14%. The levers for improvement in margin include improvement in pricing; improvement in utilisation where the company still has sufficient headroom; improving internal efficiencies by combining support and middle office staff which will benefit operating leverage; the company will continue to drive offshoring and reduce subcontract costs.  Also, the company is looking at low margin business where the company will either divest or liquidate.

The structural and long term levers which will help margin expansion in next 2-3 years include change in geographical mix; the investment in large deals, their execution that will start giving leverage benefits; streamlining portfolios will also drive margin and competencies such as digital engineering will give better margins going forward.

Effective tax rate for Q2FY2022 stood at 21.9% as against 22.8% in Q1FY2023 due to one-time gain in Q2. However, the normalized tax rate for the company is in the range of 25-26%.

Net profit margin stood at 9.8% in Q2FY2023 an improvement of 90 bps on a QoQ and 120 bps in cc terms.

Deal wins: The company had committed large deal wins in the range of US $ 700 million to US $ 1 billion. Despite challenges due to last minute slowdown in deal closure due to seasonality, the company has reported deal win of TCV US$ 716 million in Q2FY2023.

5G Telecom opportunity in India: The company will not participate in telecom equipment network and will focus on its core capabilities and purpose. Software integration and engineering both around software equipment and devices and operations are the focus area which the company is a dominant player across the world. The company will continue to work with service providers in India in these areas. The company has won one business around enterprise 5G business.

Head count: The software head count declined to 86,776 in Q2FY2023 when compared to 88030 in Q1FY2023, this was articulated earlier. Utilization was 83% in Q1FY2023 which has increased to 85% in Q2Fy2023. The company had peaked utilization around 89% and has sufficient room to increase the same. With improved utilization, the company expects the revenue to grow and also margin to improve.

Head count increase in BPO segment is on account of seasonality in second quarter.

Impairment expenses: The company had made an investment 12-14 months back which did not provide the desired results as such the company took a proactive call to move out of the business. It is a small business as such the impact is small.

The company expects impact to the tune of US $ 100 - 120 million revenue on an annualized basis due to divestment of portfolios. The company has executed around US $ 60 million in Q2 and the balance will be executed in next two quarters.

Furlough: The company is not witnessing any different trend with respect to furlough. The company expects marginally higher than what it had witnessed in earlier years however, the company will take some actions to mitigate the same.

Outlook: The company’s management is cautious on the coming winter. The company will be agile, continue to adopt and continue to monitor the global situation.The company is in a better situation as it goes through some of the rough economic conditions.

With respect to decision making, the company is not witnessing any trend as such from the customer stand point. However, with respect to macroeconomic environment, the impact is more on Europe due to inflation and Geo political concerns. Nothing has percolated into customer behavior.Pipeline and deal momentum still remains robust.

In communications business the company will get more and more clarity when companies finalize their budgets in the beginning of next calendar year.Over all the funnel and pipe line with respect to all kind of discussion is strong. The companies may reprioritize where the money will be spent contrary to where it was spent in last 2 years on the technology side. The focus on tech spend will continue to be high.Deals across cloud, engineering and connectivity are good.

On Enterprise business primarily in Europe, decision making in some certain things may get delayed.

Special Dividend:The Board of Directors hasapproved a special dividend of Rs 18 per equity share of Rs 5/- each.

Management commentary:

Commenting on the performance Mr G P Gurnani, MD & CEO said:"We continue to focus on being resilient and agile to ensure long-term value for our people, customers, partners, and the society at large. While market conditions evolve and supply-side challenges continue, we will strengthen our differentiated offerings to help customers in their transformation journey through our integrated & new-age solutions."

Commenting on the performance Mr RohitAnand, CFO said: "We have taken several targeted measures to achieve operational efficiencies and ensure long term sustainable growth. While we continue to address the dynamic market conditions, we will remain focused on creating value for our stakeholders, through continued operational rigor, robust cash generation and prudent capital a/location. Additionally, we have also announced a special dividend of INR 18 per share, in line with our capital a/location policy."