Categories Concall Highlights, Earnings, Technology

Tech Mahindra Limited Q3 FY23 Earnings Conference Call Insights

Key highlights from Tech Mahindra Limited (TECHM) Q3 FY23 Earnings Concall

Management Update:

  • [00:00:58] TECHM said that its enterprise verticals reported a milestone revenue of $1 billion for 3Q23.

Q&A Highlights:

  • [00:13:25] Abhishek Bhandari of Nomura enquired about the additional levers the company has to improve margins further. Rohit Anand CFO said that it will continue to focus on margin expansion from a labor, offshoring and automation standpoint. TECHM is also planning to drive efficiency and delivery excellence as well as leveraging synergies with its portfolio companies.
  • [00:15:25] Abhishek Bhandari of Nomura enquired if TECHM is seeing any delay in execution in the deal book. Rohit Anand CFO answered that demand for the company’s services has slowed down, and customers are taking more time to make decisions on transactions. TECHM’s existing customers have had their budgets squeezed, leading to fewer small deals and slower conversion of those deals into revenue.
  • [00:27:19] Surendra Goyal at Citigroup asked about the trends in the top 5 clients, as the performance looks weak. Rohit Anand CFO replied that several customers have internal restructuring plans that have caused a decrease in contributions YonY. This is partially due to unfavorable FX rates. TECHM feels the impact should bottom out in 4Q and will work closely with customers to see any changes in their plans.
  • [00:28:56] Surendra Goyal at Citigroup  queried about the constant currency performance in the enterprise business sequentially. Rohit Anand CFO answered TECHM has stopped disclosing it but it’s not much different at an overall avg. basis.
  • [00:29:18] Surendra Goyal at Citigroup asked if the company is seeing any meaningful change in deal durations in the TCVs. Rohit Anand CFO said the company is seeing decision making to be a bit longer than in the past, but the pipeline is still strong. Customers are being more thorough in their analysis and TECHM is staying close to them to ensure that they stay on track with their decision-making process.
  • [00:31:09] Ravi Menon from Macquarie asked about headcount reduction in software side and the headroom in utilization. Rohit Anand CFO said TECHM used to operate at 88% utilization before COVID, and while there is still some headroom, the correlation between the headcount and growth is weakening. TECHM added it will be closely monitoring the demand environment and making sure the headcount is aligned with it.
  • [00:33:32] Ravi Menon from Macquarie enquired about drivers of RoW contribution being strong in 3Q23. Rohit Anand CFO answered that in 3Q, while RoW has grown, India has adopted a margin-focused strategy. The Middle East in particular is seeing good digital deals and positive outlooks. TECHM added it is important to choose projects carefully to ensure the best profitability outcome.
  • [00:38:35] Sandeep Shah from Equirus asked about business realignment status in 3Q23 on cutting low margin business. Rohit Anand CFO answered that the ones that were done has started flowing from 2Q23 onwards. In 3Q23, there was limited impact. TECHM will work on the fine tuning and the pruning list going to the next year.
  • [00:39:54] Gaurav Rateria of Morgan Stanley enquired the correlation between the deal wins and revenue growth. Rohit Anand CFO replied that the company is still in the anticipated range of deal wins of $700 million to $1 billion, but there is pressure on decision-making due to tightening budgets and shrinking add-on/bolt-on projects, resulting in a dilution in revenue. This is expected to continue for the next couple of quarters.
  • [00:42:09] Gaurav Rateria of Morgan Stanley asked about the key factors that dragged down margins 9 month FY23 vs. FY22. Rohit Anand CFO answered the biggest impact on margins has been people costs and supply-side pressures, that had a significant effect on the wage bill. Also, acquisitions had an 80 bp impact on the D&A line item. Attrition is also going in parallel with market conditions easing out, which should have a favorable effect on the wage bill increase.
  • [00:45:44] Vibhor Singhal from Nuvama asked about the drivers of strong growth in BPO business and if it’s sustainable. Rohit Anand CFO replied that revenue growth in the quarter exceeded expectations, due to seasonality and the team’s hard work and headcount movements. The team is optimistic about future opportunities.
  • [00:56:30] Manik Taneja from Axis Capital asked if TECHM has more room to improve utilization despite a higher offshore mix of business. Rohit Anand CFO answered that the company is focusing on improving its offshore/onshore ratio and driving up utilization levels to increase margins. TECHM will be closely monitoring the demand environment in order to ensure that it remains profitable in the coming quarters.

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