Tech Mahindra hosted a conference call on Jan 30,2023. 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 commenced 2023 with a mile stone by its enterprise vertical crossing billion dollar revenue.

The company’s team has recorded strong performance in customer experience management  and customer  experience management extends to company’s service offerings of BPS and BPS also continues to deliver record performance.

The company technology team has delivered a cloud based platform which is a sector agnostic platform which will help the company’s clients improve their digital absorption, digital acceleration and more importantly cloud consumption. This has been done with the partnership of hyper-scalars and will create value for the company’s clients.

On the CME side 5G continues to accelerate growth. The company has announced with Mahindra group 5G rollout one of the largest factory at Jharkand near Pune. It is a tri-party performance between client, an telecom service provider like Airtel and value integrator like the company. This will provide lot more opportunities for the company, also it will be good for the clients as it will improve their productivity, They will use intelligent and AI driven network solutions. It will help clients innovate and help their operations run smoother.

Revenue:

In Q3FY2023 Revenues in US $ terms stood at 1668 million; up 1.8% QOQ and 8.8% YoY. Growth was broad based with Enterprise vertical growing 1.8% and CME growing at 1.9% QoQ. Q3 is usually a soft quarter.

In rupee terms revenue stood at Rs 13,735 cr up 4.6% QoQ and 19.9% YoY.

In verticals, the leader in service offerings is BPO one of the largest and fastest growing business of the company. It is one among the best performing BPO companies if it was a standalone company. In Q3 it has grown around 21% YoY.

Most of the growth in Q3 has come from Rest of the World. However, the company is very careful while picking deals and is a margin focussed strategy. While in Middle East the company is witnessing good growth momentum in digital deals.

Top 5 clients: Revenue contribution from top 5 clients has declined in Q3 both QoQ and YoY due to customer’s internal restructuring plans and focussed projects they are working on which has resulted in softness. The company expects the same to bottom out by Q4FY2023.

Margin: EBITDA margin stood at 15.6% up 50 bps QoQ. The company is capable on working on levers with confidence reasonably high to improve margins.

EBIT margin stood at 12% an improvement of 60 bps QoQ. The company got some tail wind from currency which was partially offset by increase in SG&A.

The company is not witnessing pressure on realization.

The major impact of margin in last few quarters was wage bill and the amortisation cost.

Other income stood at US $ 30 million as against 36 million in Q2 and forex gain was US $ 15 million against 16 million.

Tax rate for the quarter stood at 27.4%.

NPM margin stood at 9.4% lower by 40 bps QoQ due to lower income tax in Q2.

The company is committed to improve operating margin and levers for margin improvement include-Sub contract cost are still high and plans to bring it down to normalised levels; increase offshoring; shutting down or divesting some of non-strategic assets where margins are not favourable; optimization of delivery excellence and improve synergy with portfolio companies which will drive both cost optimisation and revenues.

From sub contract perspective due to travel restriction and large deal requirement of specific niche skill sub contract cost was higher as a percentage of revenue. The company has a transition plan to substitute or replace that. The company has significant opportunity not only in current quarter but few quarters to come which is a short to medium term lever to work on.

Despite the company taking reasonable steps for more and more offshoring, the onshore : offshore mix has remained more or less stable because of reduction in headcount. And  the company has significant headroom in this area.

Spread between US $ and constant currency: The company had a headwind in last quarter due to movement of GBP and Euro with dollar predominantly, which has corrected in this quarter. This had a negative impact in Q2 and a positive impact in Q3.

Head Count: The pre-covid utilisation was around 88% and the company has significant head room to improve utilization.

The macroeconomic environment is relatively volatile and the company aligned the headcount to macroeconomic environment as such there is reduction in headcount.

There is no direct correlation between head count and revenue. Head count will be aligned and monitored with the demand environment.

Deal Wins: The Company’s large deal team has done a great job. Net new deal wins during the quarter stood at US$ 795 million.

The company has won large deals in Americas. Digital transformation and business transformation has been the keys for wins during the year

Average deal size has not changed much for the company. It had won 1 or 2 large deals in last four quarters and has won one large deal in Q3. The company has removed those clients which do not provide economies of scale.

Growth of Active clients’ additions has reduced which is a conscious decision to rationalise and right size the customers.

Outlook:  The Company plans to become lot more agile, build its operations well aligned with the 1290 customers on a monthly basis which was earlier looked on quarterly basis.

The company is witnessing record deal flows in Cost transformation, digital transformation and business transformation. The company has witnessed some of its clients hitting the pause button on discretionary spending.

The company is witnessing demand to be strong, drivers for the demand are also strong however, it is witnessing challenges in the short-term. Decision making has slowed down in 1^st half and slightly longer. Some of the small incremental deals with clients have also reduced, squeezed.

Deal pipeline is strong and some of them are nearing closure.

The company is witnessing pressure in developed markets like US , UK and Europe. The company expects growth in markets (Rest of the World) where pressure on GDP is lower.

Management Commentary:

Commenting on the performance Mr C P Gurnani, Managing Director & Chief Executive Officer, Tech Mahindra, said“We are witnessing moderation in growth given the tough macro-economic environment. We will continue to work with our customers to pre-empt their technological requirements and identify new demand drivers, especially for digital services.”

RahitAnand, Chief Financial Officer said “Our numbers reflect resilience as we continue to work on the expansion of operating margin. I am confident that our strategy of client centricity & agility combined with delivery led transformation wi/I help us create value for our customers and stakeholders alike.”