Tech Mahindra Limited Q2 FY24 Earnings Conference Call Insights

Key highlights from Tech Mahindra Limited (TECHM) Q2 FY24 Earnings Concall

• Financial Performance
  • Revenue declined 2.4% in constant currency vs. last quarter due to market pressures and rationalization of non-core businesses.
  • EBIT margin dropped 200 bps to 4.7% due to revenue decline and one-time costs related to rationalization.
  • Operating margin declined from 8.6% last quarter to 7.3% after adjusting for exceptional items.
• Large Deal Momentum and Market Headwinds
  • $640 million in large deal TCV wins, higher than last quarter.
  • Pipeline for second half looks healthy but deal closure cycles remain elongated.
  • Discretionary spending cuts by customers, especially in core verticals like communications, amid high interest rates.
  • Working on business reset and refresh to adapt to market dynamics.
• Reorganization and Strategic Plans
  • Undergoing a major reorganization to drive greater customer focus and improve business economics.
  • Reorganization aims to improve customer intimacy, focus on key accounts and large deals, and add domain expertise.
  • The company will continue to leverage strengths in telecom and manufacturing verticals.
• Impact of Business Rationalization
  • TECHM has taken steps to rationalize underperforming business areas.
  • Additional rationalization actions were taken in 2Q and will continue in Q3.
  • Aims to improve risk management, margins, cash flows and sharpen strategic focus.
  • Full benefits expected in FY25; Q4 FY24 could be start of clean slate performance.
• Medium-term Growth and Margin Aspirations
  • Priorities appear to be improving margins while accelerating revenue growth.
  • Leveraging automation, subcontractors and acquisitions to reshape cost structure.
• Strengthening Non-telecom Capabilities
  • Telecom is cyclical and over 40% of revenues currently.
  • Expanding offerings like network services to other sectors.
  • Building capabilities in manufacturing, BFSI, healthcare and more.
  • Aim is to diversify revenues across sectors while retaining telecom strength.
• Employee Cost Trends
  • Employee costs up 3.5% CQGR last 4 quarters despite lower headcount due to wage hikes in Q1 and Q2 this year versus Q2 and Q3 last year.
  • Also hiring freshers as long-term strategy for pyramid correction.
• Outlook for Telecom Vertical
  • Global telecom growth muted, no major pickup expected in H2.
  • Focus is on optimizing delivery while retaining domain expertise.
  • Well positioned to grow when telecom spending rebounds.
• Margin Levers Going Forward
  • Pyramid structure, resource costs, service line mix.
  • Productivity improvements, automation in fixed price projects.
  • Headcount ratio optimization, subcontractor mix.
  • Limited opportunity from SG&A optimization.
• Top Accounts Revenue Concentration
  • Revenue from top 5 clients down 30% in last 6 quarters due to planned rationalization in some accounts.
  • Communications vertical issues in some key accounts.
  • Overall aligned with lower discretionary spending.
• Business Challenges in Finance & Manufacturing
  • TECHM sees big opportunities in manufacturing due to digital transformation and the company’s heritage via the Mahindra Group.
  • Aims to build on insurance strengths in BFSI while acknowledging there is more work to do in banking.
• Margin Improvement Plans
  • Margins were impacted in Q1 and Q2 by one-time expenses from closing unprofitable contracts and businesses.
  • Adjusting for these expenses, core margins were down 400 bps due to revenue pressure and wage increases.
  • The company aims to align costs with slower revenue growth in the near term.