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Tech Mahindra stocks: Can Tech Mahindra hit the aspirational band of 14-15% margin by year end?

Post Q2 results, CP Gurnani, MD & CEO, and Rohit Anand, CFO, in conversation with ET Now. Tech Mahindra on Tuesday reported a 4% year-on-year (YoY) fall in consolidated net profit for the quarter ended September 2022 to Rs 1,285 crore. That said, the bottomline was higher than the ET Now poll estimate of Rs 1,210 crore. Revenue for the said quarter increased nearly 21% on year to Rs 13,129 crore.

This is a question I have asked you every quarter and you have been telling me that the deal pipeline continues to be at record high level. If that is so, why was there a bit of slowdown this quarter when it comes to deal wins? Is this just the timing mismatch?

CP Gurnani: I would love to give you a different answer because of the old saying numbers do not lie. The numbers clearly show that the deal pipeline is one of the best in the last five years. Yes, when it comes to overall decision making, in CME as well as enterprise we have done reasonably well. There have been a few deals that were expected particularly from Europe where there is a little bit of delay but I would consider that only as a timing issue and not as something that would concern me or worry me.

So you are maintaining the $4 billion order inflow guidance that you had told us earlier in the year. Will TCV be close to $4 billion for the year?

CP Gurnani: I do not know whether I ever gave you that firm guidance but my typical quarter would be $700 million to $1 billion dollar plus and I would like to maintain that every quarter our endeavour is to deliver more than $700 million and given a choice, more than a billion.

Talking about traction, we have seen quite a bit of upside on margins this time around at 11.4% but it is still far away from that 14-15% which is an aspirational band.You had talked about how by the end of the year, you are likely to hit that mark. Are you on track to 14-15% by year end?

Rohit Anand: For the current quarter, a l1.4% margin is a 40 basis point improvement when we adjust for currency. We have a headwind on currency of 30 basis points because of the regional mix. We achieved an operational improvement of 70 basis points in the quarter. This is on the back of wage increases that we do cyclically in this part of the year. It is a big jump from a quarter to quarter perspective and that is all driven by actions that we had articulated that we will be doing on an operational basis – be it price increases, utilisation increase offshoring and the other measures operationally that drive the business better as we move forward.

As we move forward, we will continue to drive those measures because we feel our operational efficiencies can get better in a lot of areas. As we move into Q3, Q4, our teams that drive this on a day-to-day basis will continue to intensify that effort as we move forward.

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So the variable here as we look into the second half is going to be how Europe and the regional geographies pan out in terms of recession or macroeconomic situation. We will have to continue to watch that out as we drive our internal operational efficiency.

That point is taken but what I want to understand from you is whether the 14% mark is going to be elusive given the headwinds that you talked about in Europe?

Rohit Anand: On pricing, we have been still having favourable conversations and this does not happen over one or two discussions, it takes periodic discussions, data validations with a lot of customers. We have been getting favourable outcomes there and we continue to see that coming through in this quarter as well.

In terms of our path for the year, as I had mentioned earlier, we will continue to drive these outcomes and operational efficiencies. We will have to continue to look at the topline and the recession impact on various geographies and then evaluate where we land up. For now, from a guidance perspective all I can say is that we have got the internal engine firing on all these measures which we will continue to drive.

Is there any segment or sectoral trend that you want to call out? It appears this time around the growth has been led by manufacturing as well as technology while communications was a bit slow and even BFSI declined sequentially,

CP Gurnani: Overall, you are right in calling out that CME has grown well. From my perspective, if at all manufacturing has bounced back, high tech continues to do well and the BFSI slowdown is just temporary. When you close down on a large project or are doing a bit of a divestment, in this particular case, the new deals were alright. The divestment that we did or closed down on a large project. I would remain upbeat and confident on BFSI and see this slowdown as temporary only.

Is it the same for Europe as well that the slowdown is temporary because this quarter there was a sequential decline of 3.5%. In the next 6 to 12 months, should we expect some sort of consolidation around European business?

CP Gurnani: In constant currency, they are showing growth. In Europe, in constant currency, they have grown plus 3.6% and my personal feeling is Europe will become a land of opportunities for Tech Mahindra. Overall, it may take a little bit of time for recovery because one or two quarters in this long innings would not really make a difference.

I am still on a growth journey and my belief is our diversified country base in Europe as well as our own development centres in Europe will be an advantage because Europe will focus a lot more on operating efficiencies and on becoming more productive. Tech Mahindra is in a better position to play a strong innings there.

Is this being supported by the headcount addition plan as well? This quarter also we are seeing a decent improvement in headcount addition. What is the target for the entire year and in terms of wage hikes, etc, could you tell us broadly what the quantum was?

Rohit Anand: From a headcount perspective, the increase in this quarter has been predominantly BPS ramp up for the seasonality. From an IT perspective, we were pretty clear at the beginning of the quarter that we will focus on utilisation improvement and other productive measures. From a deal pipeline perspective, the momentum continues as CP mentioned and we usually do not give guidance from a headcount target or the year-end perspective.

But the deal pipeline is an indication of how the future looks like. As we move forward, we are cautious on certain macroeconomic indications.

Whatever you can manage internally is attrition and utilisation. Both have seen an improvement quarter on quarter. Do you expect this to continue to move on an upswing?

Rohit Anand: Yes, from an utilisation perspective, we have operated on a high level of almost 89%. We are right now at 85% and so there is still 4% on getting towards the high point. But we are getting closer towards entitlement there.

From an attrition perspective, we are probably the best right now. From our peer set perspective based on various measures that we had articulated to all, we have been driving consistently over the last three or four quarters and will continue to work on the basics and fundamentals on these measures as we move forward.


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