Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Tech Mahindra Ltd (BOM:532755, Financial) reported a sequential revenue growth of 0.7% in Q1 FY '25, reaching $1,559 million.
- The company saw robust growth in the manufacturing and healthcare verticals, with year-on-year increases of 6.4% and 6.1%, respectively.
- Tech Mahindra Ltd (BOM:532755) secured new deal wins totaling $534 million, diversified across various industry verticals and key regions.
- The launch of TechM VerifAI aims to facilitate enterprise-level adoption of AI by providing a robust validation and assurance framework.
- The company reported an operating margin expansion to 8.5%, a 110 basis point increase from the previous quarter, driven by cost-saving efforts and operational efficiencies.
Negative Points
- Year-on-year revenue declined by 1.2% on a constant currency basis, indicating some underlying challenges.
- The communications vertical experienced a seasonal decline, partly due to reduced revenues from Comviva.
- The BFSI vertical, despite some new opportunities, is expected to show volatility in revenues due to its relatively small size and early stage of transformation.
- The company did not announce wage hikes for employees, stating they would revisit this decision in the second half of the year based on financial performance.
- Tech Mahindra Ltd (BOM:532755) faces challenges in the telecom sector, which continues to be stressed, although there are expectations of improvement over time.
Q & A Highlights
Q: Has the Comviva seasonality come down, and can you call out the drag due to Comviva at both revenue growth and margin level during the quarter?
A: The Comviva drag from Q4 to Q1 is roughly about 0.5%, affecting both revenue growth and margin.
Q: Can you highlight a few trends in your key verticals, including communications and BFSI?
A: In BFSI, we are focusing on mining existing accounts and adding new logos. We see opportunities in core banking, wealth and asset management, insurance, and payments. In telecom, despite a challenging sector, we expect year-on-year improvement over time due to our strong competitive position and focus on cost rationalization and AI-native telcos.
Q: Can you elaborate on the development of a large language model and its expected monetization model?
A: The large language model was developed as a research project within our Makers Lab, focusing on Hindi dialects. We are still working on commercialization models with various clients and third-party providers. It demonstrates our AI capabilities but is not expected to be a significant revenue contributor.
Q: What internal metrics are you using to gauge the progress of your turnaround efforts?
A: We focus on growth, margins, and organizational talent transformation. Metrics include growth in priority accounts, competency build, market investments, margin improvements through cost optimization, and employee upskilling. We track these closely and plan to report progress annually.
Q: How much of the positive developments in BFSI are due to improved demand versus Tech Mahindra's improved positioning?
A: The demand environment in BFSI is stable. Our gains are mostly due to internal efforts, including a new team, focus on existing clients, solution development, and integration of portfolio companies. We are benefiting from improved market positioning.
Q: What has driven strong growth in BPO, and does the reliance on contact center services worry you given the impact of Gen AI?
A: The BPO growth is partly due to segmental changes. Our BPS business is innovative, leveraging AI in contact center solutions and platform capabilities. Our contact center dependence is low, and we are infusing AI to drive growth and productivity.
Q: Will you participate in telecom consolidation deals, given profitability considerations?
A: We prioritize margin over revenue and will compete for deals that align with our terms. We continue to win telecom deals but avoid those that are cash-negative or margin-dilutive.
Q: How are you progressing against the target of reducing costs by $250 million annually and investing 1.5% of revenue in the first year of the turnaround?
A: We have expanded margins by 1.2% through cost optimization under Project Fortius, despite headwinds from Comviva revenue decline and Visa costs. We continue to invest in areas like pyramid expansion, learning and development, and sales and marketing.
Q: Is the demand environment similar to what was envisaged at the beginning of the year, and does improvement present an upside to margin targets?
A: The demand environment is stable, similar to what was expected. If it improves significantly in the second half, it could positively impact margins, assuming attrition levels remain stable.
Q: Are you seeing any unexpected furloughs in certain sectors like high-tech?
A: There are one or two clients with unseasonal furlough requests, but it is not material or widespread.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
