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.