Tech Mahindra hosted a conference call on July 26,2023. In the conference call the company was represented by Mr C P Gurnani-CEO, Mr Mohit Joshi MD & CEO designate and Mr Rohit Anand –CFO.

Key takeaways of the call

Challenges of Global economy, challenges of communication and media sector resulted in one of the toughest quarters of recent quarter for the company. However company believes that tough time will not last and unprecedented times will not last.

Some of the transformation projects coming to an end, one of the customers filing bankruptcy and few challenges on the road resulted in revenues dropping in Q1.

Q1 is a blip in the company’s growth trajectory however; it has a robust pipeline of opportunities across geographies, verticals and service lines. The company is confident in its ability to overcome  the current challenges  and emerge  as a leader in  IT services industry. Market demand is strong and company is in a position to capitalize future growth opportunities.

Revenues in US dollar terms stood at US $ 1601 million in Q1FY2024 as against US $ 1668  million in Q4FY2023 down 4% QoQ. Decline was led by CME vertical which declined by 9.4% while Enterprise vertical declined by 0.4%.

Decline in revenue of CME vertical, was on account of cyclicality, impact on projects which were commenced 2-3 years back being closed. On network and IT digital transformation deals were either closed or deferred.

Impact on revenues on account of one of the customer going bankrupt is to the tune of US$ 6-7 million QoQ. This will not have an impact on revenues in Q2.

Revenue in rupee terms stood at Rs 13,159 crores in Q1FY2024; down 4.1% QoQ, up 3.5% YoY.

EBIT declined from Rs 1530 crore in Q4FY2023 to Rs 891 crore in Q1FY2024. EBIT margin declined to 6.8% down 440 bps. Decline in margin was on account of decline in revenues impacting margins to the tune of around 2%, One time provision with respect to customer going bankrupt impacting the margin to the tune of 2% and impact on margins on account of seasonality to the tune of 0.5%.

All the risk has been covered with respect to bankrupt client.

Levers for margin: The company has reduced sub con cost from 16% of revenue to 14% of revenue and will continue to work to reduce the same to less than 10%; Pyramidization is one area of improvement and the company will continue to work on it; the company will continue to drive offshoring which will improve by 4-5% and will continue to divest non-core strategic assets.

Wage hike: The company has given wage hike to majority of the employees. Wage hike of senior position will be effective in Q2.

Despite reduction in employees by around 6% YoY, there was increase in employee expenditure in Q1-this was on account of wage hike given to employees in FY2023 in Q2 and wage hike in Q1 FY2024 leading to double effect.

The company has added around 200+ people in sales and support which is part of leadership program of hiring.

Effective tax rate for the quarter stood at 27.6%.

Outlook:

With respect to communication vertical most of the headwinds are behind, however most of the telecom companies are tight on their budgets both with capital outlay and opex. Revenue was down in Q1 as there was element of cyclicality. However, fundamentally and structurally, the company is very well placed to scale growth.

With respect to telecom vertical, the company expects to recover in second half of FY2024. With respect to deal closures 1^st half was tough due to macro economic environment however, the company expects it to recover in second half.

Manufacturing vertical is going through transformation. Spend is on digitization and embedded systems which are being added. In the manufacturing vertical the company’s focus is on automobile and Aero both of which are growing. Pipeline is also robust.

BFSI vertical- The company is focusing on US geography and areas where it has less presence.

The company expects upside on account of a)The company’s customer focus, customer relationship and dialogue with the customers are strong that effectively means that the company can plan lot better and customer centricity will help the company recover from where it is today; b) Investment in talent (for example 8000+ employees in new AI and generative AI) which effectively means is that the company utilised some of the challenges to repurpose and retrain the people. Focus on people, focus on talent has helped company build strong AI studio, develop lot of solutions from use cases which will help the company going forward; c)The company is investing and continue to invest not only in new tech but also on quant computing, cyber security and AI. This will help company provide differentiated solutions to the clients in 5G, connected solutions and networking which will be the strong differentiator for the company by increasing its reach to the clients;and d) the company has lot of operating levers and is getting to the mode of execute.

Management Commentary:

Commenting on the performance Mr CP Gurnani MD & CEO said "Our results this quarter reflect the uncertainty in the global economy and the IT sector. We are confident that we have the right strategy and the right team to overcome this temporary setback and deliver long-term value for our customers and shareholders.”

Mr RohitAnand –CFO said "This quarter was a challenging one for us as revenue growth faced strong headwinds and that had an impact on profitability. We have taken swift and decisive actions to address these issues and improve our execution.”