Tech Mahindra Limited Q3 FY22 Earnings Conference Call Insights

Key highlights from Tech Mahindra Limited (TECHM) Q3 FY22 Earnings Concall

Management Update:

• The company reported the fourth quarter of $700 million plus deal wins. TECHM plans to invest either to acquire or fill gaps in its engineering capability or in the domain capability going forward.

Q&A Highlights:

• Mukul Garg from Motilal Oswal asked about the trajectory of SG&A going forward. Milind Kulkarni CFO said that there were some on-offs in the quarter compared to earlier quarters and that’s the reason SG&A will go back to the normal level of about 13% in future, resulting from the growth leverage. The company hasn’t reduced any investment in sales and marketing and that’s reflected in the healthy growth.

• Mukul Garg from Motilal Oswal also asked about the impact in the BFSI and technology verticals, if it was more of a one quarter decline in Q3 or was there something different. Milind Kulkarni CFO said it was more of a furlough impact. Therefore, one should see a good rebound in the coming quarter.

• Gaurav Rateria of Morgan Stanley asked about the nature of deals coming in 5G and are they more short cycle in nature and linked to the rollouts. Manish answered that the company’s 5G positioning is not directed only towards network deployment. TECHM will focus more on system integration, realization of network from certification standpoint, and design and digital cloud aspect of 5G.

• Manik Taneja from JM Financial asked about subcontracting expenses in the near to medium term. C.P. Gurnani said that in subcon, in the last few quarters, its pressure went up due to the travel restrictions continuing to be able to have people positioned in the required roles, plus the timing of roles and the needs. In future, it’s a big lever for TECHM and will add to the tailwind over FY23.

• Manik Taneja from JM Financial queried about talent strategy for Tier 2 Tier 3 cities. Harshvendra Soin Global Chief People Officer replied that the company will do few things that will be a clear differentiator. The company added that in the Tier 2 towns it hired almost more than 8,000 people and realized that the average costs were lower by about 15% but the dropout rates were also lower by about 15%. Consequently, it would help in cost.

• Sandeep Shah from Equirus Securities asked that on margins, the company did better in the last two years on a YoY basis and in FY23 also if the margin movement will be better. Rohit Anand SVP answered that the company has headroom on expanding margins, and looking at levers, short term sub con cost is a visible headroom moving to next year and offshoring improvement is another headroom for improvement. Thinking of cost pressure is price increases and that TECHM is trying to have a good momentum going across the business units.

• Dipesh Mehta from Emkay Global enquired about the organic revenue growth in 3Q. Rohit Anand SVP said that on an organic growth perspective, growth for the quarter is 4% and the reported number is 4.1%, with a currency headwind of around 60 basis points, which gets to the 4.7% on a constant currency.

• Dipesh Mehta from Emkay Global also asked that in the last 9 months, the company added around 24,000 employees and of this how many were freshers and how many from acquisition. Harshvendra Soin said that this year, TECHM would probably add about 10,000 at the bottom of the pyramid, that’s freshers and the idea is to increase it substantially in the next year.

• Urmil Shah from Haitong Securities enquired about the PFS and the tech vertical, if the softness was in line with what was expected at the start of 3Q or if there was a one-off slowness and ramp-up of new deals. Rohit Anand SVP replied that this is a part of typical trend in this time of the year, which was expected. TECHM is working on some deals in this segment that the company is seeing closure soon in terms of growth momentum to continue.

• Abhishek Shindadkar from Ingrid Capital clarified about the standalone business where growth is better but margins are low for 3-4 quarters. Rohit Anand SVP answered that one has to look at it on a consolidated basis from a combined perspective as there’s interfungibility of the deals done from a customer perspective. Therefore, it needs to be looked at it collectively on a consolidated basis to see the whole trend.

• Mukul Garg from Motilal Oswal also asked about the legal cost, and was it materially different in last two quarters. Milind Kulkarni CFO answered that there is no significant difference in legal costs.