The IT enabler of the telecommunication industry – Tech Mahindra

“We clearly are again investing making sure that we continue with our investments not only in the new technologies, we have announced more investments in quantum computing, cybersecurity and AI, but I think overall our primary differentiator will be 5G connected solutions and networks and experience management. And we will convert them into solutions for the clients, not only the 30 use cases that I said about AI, but also by increasing our reach with the clients.“

CP Gurnani, Managing Director

Stock data

Ticker	TECHM
Exchange	BSE and NSE
Industry	IT-Software

Price Performance:

Last 5 days	+1.80%
YTD	+24.91%
Last 1 year	+11.92%

Company description:

Tech Mahindra is a leading global provider of IT services and business process outsourcing solutions. The company is part of the Mahindra Group, a multinational conglomerate. Tech Mahindra offers a wide range of services, including IT consulting, software development, system integration, cloud computing, cybersecurity, artificial intelligence, and data analytics.

Services Offerings:

1. Telecom Solutions: Tech Mahindra has a strong presence in the telecommunications sector and provides services to major telecom operators worldwide. This segment includes network services, digital transformation, and customer experience management.

2. Digital Transformation: Tech Mahindra assists clients in their digital transformation journey by leveraging emerging technologies such as AI, IoT, blockchain, and cloud computing. The company offers digital consulting, platform solutions, and industry-specific services.

3. Healthcare and Life Sciences: Tech Mahindra provides IT solutions to healthcare and life sciences organizations, helping them improve patient care, optimize operations, and comply with regulatory requirements.

4. Finance and Banking: The company offers financial services, including core banking solutions, wealth management, and risk management services. It caters to banking and financial institutions worldwide.

5. Manufacturing and Engineering Solutions: Tech Mahindra serves manufacturing industries with services like product engineering, supply chain management, and smart manufacturing solutions.

Global Presence:

The company has a global presence with 1,52,000+ employees across 90+ countries. It services 1,290+ clients including several fortune 500 companies.

Client Base:

As of FY23, the company has an active client base of ~1,200 clients. Its top 5 clients contributed ~18% of revenues, top 10 contributed ~26% of revenues and its top 20 clients contributed ~37% of revenues in FY23. 

Decrease in Attrition Rate:

The IT attrition rate decreased from 23.5% in FY22 to 14.8% in FY23. The need for digital expertise increased due to the rising demand for digitization and the boom of the start-up ecosystem. 

Scheme of Merger:

The BOD approved the Scheme of Merger of Tech Mahindra Business Services Ltd and Born Commerce Private Ltd with the Co. In this regard, the Co. has filed the petition before the NCLT.

Acquisitions:

During FY22, the company acquired a 100% stake in DigitalOnUs Inc, Eventus Solutions Group, LLC, Beris Consulting GmbH, Infostar LLC (Lodestone), We Make Websites, Brainscale Inc, Activus Connect LLC, and Activus Connect PR LLC, n Green Investments LLC, and Com Tech Co IT Limited through its different wholly owned subsidiaries. It also acquired an 80% stake in Geomatic.AI Pty Ltd, Australia through its wholly owned subsidiary company Tech Mahindra (Singapore) Pte. Ltd.

Acquisition of Satyam Computers:

In 2009, the company acquired a 51% stake in Satyam Computers for ~2900 crores. 

In 2013, the company completed the merger with Satyam Computer Services Ltd with itself, creating the 5th largest IT company based in India. 

Focus:

The company focuses on leveraging next-generation technologies including 5G, Blockchain, Quantum Computing, Cybersecurity, Artificial Intelligence, and more, to enable end-to-end digital transformation for global customers.

Financials:

What we like:  

1. Part of Mahindra Group:

The company is a part of Mahindra Group which is a globally recognized conglomerate having a presence across 100+ countries. It has a presence across various industries viz. IT, Agri, aerospace, automotive, consulting, defense, energy, logistics, and others. This helps the company leverage a lot of deals in its space.

2. Accelerating investment in New age platform and Generative AI:

TECHM continues to invest in building up its talent base and has trained over 8000 employees in the New Age AI platform and Generative AI. The company sees a huge opportunity in AI, 5G, Quantum computing, and cybersecurity. While the transformation is being adopted globally, we expect demand to remain robust, owing to clients focusing on digitalization to improve their efficiency. Despite the short-term uncertainty, management remains optimistic about long-term growth and anticipates deal wins to rebound going ahead 

3. Margins to improve on a sequential basis:

The EBIT margin for Q1FY24 stood at 6.77%, which showed a decline of 427 bps on a YoY basis and 284 bps on a sequential basis. The decline can be attributed to a drop in revenue, an increase in wages, and a one-time provision due to client bankruptcy. However, the reduction in subcontracting expenses, increase in offshoring activities, and improving pyramid structure are the levers that will improve margins going ahead. The FCF to PAT stood at 126.3% during the quarter. The utilization rate for Q1FY24 stood at 87%, and management expects that the utilization rate will see further improvement of 3%-4% going ahead. The attrition rate also declined to 13% in Q1FY24.

4. 5G rollout to help company capture the revenue further:

Although its 1Q performance was weak, TECHM’s high exposure to the Communications vertical offers a potential opportunity, as a broader 5G rollout is likely to result in a new spending cycle in this space. As more and more telecom partners venture into this space, Tech Mahindra is likely to benefit from the deals.

5. Diverse Service Offerings:

The company offers a diverse portfolio of services, including cloud computing, cybersecurity, artificial intelligence, and data analytics. This diversification allows Tech Mahindra to tap into emerging technology trends and cater to a wide range of client needs.

Factors to consider:

1. The IT services industry is highly competitive, with numerous global and regional players. Intense competition can exert pressure on pricing and margins
2. Tech Mahindra’s revenue is concentrated among a few key clients. A loss of a major client or a reduction in their spending could negatively impact the company’s financials.
3. Economic downturns in key markets, such as the United States and Europe, where Tech Mahindra has a significant presence, can affect client spending on IT services.

Conclusion:

Tech Mahindra, a prominent player in the IT services and business solutions arena, stands out for its diversified portfolio of business verticals. Its strategic focus on key sectors, including telecom solutions, digital transformation, healthcare and life sciences, finance and banking, and manufacturing and engineering, positions it as a versatile and reliable partner for clients across industries. With a global presence and a commitment to harnessing emerging technologies like AI, IoT, blockchain, and cloud computing, Tech Mahindra is well-equipped to drive digital transformation and innovation. However, investors should be mindful of the competitive landscape, client concentration risks, currency exchange exposure, and the potential impact of regulatory changes.

Tech Mahindra’s journey as a technology enabler continues to evolve, making it a compelling choice for investors seeking exposure to the IT services sector. Careful consideration of its business verticals and risk factors is essential for making informed investment decisions in this dynamic market.