Tech Mahindra Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Double-digit FY23 growth, but Q4 margin slipped: Revenue grew double digits for the full year, yet Q4 EBIT margin fell 80 bps QoQ, driven largely by currency and year-end SG&A costs.
• Large deal engine delivered \$3 bn in wins: The company closed about \$3 billion in large deals during FY23, and management expects to do "a lot better" in FY24 as clients take big platform decisions.
• Telecom and network businesses each hit billion-dollar scale: The 5G business reached a billion-dollar run rate, while the network business is expected to approach that mark by year-end, validating the 2015 LCC investment.
• Margin recovery is promised irrespective of macro: Management pointed to subcon reduction, large deal maturity, offshoring, and pyramid rationalization as levers that will improve margins even if the demand environment stays cautious.
• What to watch next quarter: Whether the "temporary" demand slowdown actually reverses within FY24 as the CEO predicts, the pace of subcon reduction, and any stabilization in the top 5 client accounts.

Demand Environment

• Macro caution is real and spreading: Global economic uncertainty and monetary policy actions are causing some customers to slow down temporarily, with transformation projects now going through an added evaluation lens before money is released.
• Discretionary spend under pressure: The slowdown is affecting both CAPEX and OPEX as clients scrutinize transformation spending more closely, though the company frames this as a delay rather than a cancellation of demand.
• First half cautious, second half better: Management confirmed that headwinds continue in some form for the first half, with the pipeline robust but deal decisions delayed; the second half is expected to improve directionally.
• Top 5 client decline stabilizing: The majority of the impact from weakness in the largest accounts should be towards the fag-end, with the trend appearing to stabilize.

CP Gurnani: "My personal belief is that this phase is temporary, and we will see a recovery within FY24 and hence I remain more determined to be aligned with our customers, be aligned with our partners, and deliver value and more technology benefits."

Margins

• Full-year margin compression was 300 bps: FY23 EBIT margin declined broadly 300 bps vs FY22, driven by wage inflation (aggravated in early quarters), post-COVID SG&A and travel normalization, deal M&A related costs (~50 bps), and large deal ramp-up costs (~70 bps).
• Offsets came from pricing and offshoring: Pricing expansion contributed close to 1% as targeted, subcon reduction added 80 bps, and offshoring benefit contributed 30 bps.
• SG&A spike is temporary: The Q4 SG&A jump reflects year-end cost skew and will normalize; the target band remains ~13.5% of revenue.
• Margin levers are structural, not macro-dependent: Management insists margin improvement will happen irrespective of the macro view, citing large deal maturity, a 4-5% offshoring improvement opportunity, dramatic subcon reduction ahead, pyramid rationalization, and divestment of non-profitable businesses.
• Wage hikes will be staggered: The company will spread wage increases across quarters rather than taking a single large hit, though the exact cadence (two or four quarters) is undecided.

Rohit Anand: "I think our large deals will get a little bit more maturity in terms of where they are to where we want them to be next year so that's one lever. Second, we had articulated we still have almost 4% to 5% improvement opportunity in our offshoring rates versus where we are today so that will continue to drive."

Deal Wins & Pipeline

• FY23 large deal TCV reached \$3 billion: The company closed approximately \$3 billion in large deals during the fiscal year, spanning platform migrations, legacy-to-digital transitions, and network services.
• FY24 outlook is for more, not less: Management expects to do "a lot better" on large deals in FY24 because economic pressure forces clients to take big platform decisions they might otherwise defer.
• Deal decisions are delayed, not lost: The pipeline is robust but clients are taking longer to sign; large deal decisions could take a month or more, translating to revenue towards the second half.
• On an annual basis, wins should not be far off: Based on the quality of discussions, management believes FY24 deal wins will not be far off from last year's level, though they declined to give a specific number.

Vertical & Business Highlights

• Telecom vertical delivered consistent growth: The segment has grown for 12 consecutive quarters despite challenges, with the 5G business hitting a billion-dollar run rate.
• Network business is a differentiator: The network services business, built from the LCC investment in 2015, is close to a billion dollars and expected to reach that mark by year-end.
• Enterprise touched a billion-dollar quarterly run rate: Billion-dollar businesses have been built in BFSI and Manufacturing, reflecting diversification beyond the telecom heritage.
• CME grew for 12 straight quarters: Communications, Media and Entertainment continued its streak of growth despite sector headwinds.

Manish Vyas: "I think from a mid-term to long-term standpoint, the discussions that we are having with this sector are absolutely all time best and I don't think we need to be concerned about that."

Capital Allocation & Shareholder Returns

• Dividend expanded 11%: The board approved a final dividend of Rs. 32 per share, taking the total FY23 dividend to Rs. 50 per share, up from Rs. 45 in FY22.
• Payout ratio at 91%: The dividend payout ratio for FY23 stood at 91%, consistent with the policy of returning extra cash to shareholders.
• Free cash flow conversion healthy: Q4 free cash flow was 104% of PAT; the full year conversion was 84% of PAT.
• DSO improved: Days sales outstanding reduced by 2 days to 96 in Q4 vs 98 in Q3.

People & Operating Model

• Internal fulfillment surged: The company increased internal fulfillment from 46% to 71% through upskilling and creating internal opportunities, reducing dependence on subcontractors.
• Attrition lowest in peer set: The company highlighted its attrition rate as the lowest among peers, supporting margin levers around pyramid rationalization and subcon reduction.
• Investment in upskilling to double: The company plans to double investment in people upskilling, technology, and prioritizing select markets like Japan and the Middle East.
• Technology bets span the frontier: Investments continue in Quantum Computing, Metaverse, Blockchain, Web 3.0, Cloud, and Customer Experience Management, which management says are yielding good results.

CP Gurnani: "I again want to repeat to me that the soft environment is an opportunity and Tech Mahindra is geared for that opportunity through our own investments in technology and automation."

Guidance & Commitments

Key Metrics