Tech Mahindra Ltd Q2 FY2024 Concall Summary

Key Takeaways

• A deliberate reset quarter: Revenue fell 2.4% QoQ CC as the company began exiting non-core business and discretionary spending stayed under pressure, a combination management admits it did not budget for.
• Margins cratered on cleanup: Reported EBIT margin dropped to 4.7% (200 bps QoQ decline); adjusted for one-time rationalization charges, operating margin was 7.3% versus 8.6% last quarter.
• Large deal momentum improved: The company signed \$640 million in large deals, spanning FinTech, digital transformation, and telecom network modernization, though conversion cycles are elongating.
• A new organization and a new CEO are coming: A six-SBU structure goes live January 1, and Mohit Joshi takes over as CEO on December 20, with a full revenue and margin plan promised for April.
• What to watch next quarter: Whether Q3 delivers the final non-core cleanup as intended, the pace of large deal conversion, and any early signals from the new organizational structure.

The Rationalization: Exiting Non-Core Business

• What was cut: The company took actions on non-focused geographies, contracts, business lines, and service lines, deciding to take no more business in those areas, closing contracts, and terminating projects with no long-term strategic or viability runway.
• The one-time hit: A 260 bps impact this quarter came from deciding not to take business and closing contracts, not from severance. Severance could be a next step where no viable divestment case exists, possibly next quarter, but depends on regulatory and other aspects.
• The margin math: The annualized action covers roughly \$60 million of low-margin business. Assuming a 0% margin on that business versus a portfolio average of 15%, the annualized benefit is approximately \$9 million.
• Top client impact: Rationalization within top customers, where non-strategic, non-core pass-through business was taken out, caused a 1.5 crore per quarter impact. Discretionary spend decline added further pressure on top clients.
• The cleanup timeline: Intent is for Q3 to be the last quarter of cleaning up non-core revenues with potential one-timers, and Q4 to be the start of a clean slate. However, actions depend on customer interactions and other dependencies, making the commitment conditional.

Mohit Joshi: "I'm also quite keen that we are all quite keen that we don't do any suboptimal deals that we don't -- this is not the time for us to be doing crazy deals and I want us to avoid that temptation."

Margin Walk & Cost Pressures

• Revenue pressure is the primary driver: The number one factor behind the margin decline is the top-line contraction, with the regular wage cycle adding cost from a Q1-Q2 perspective.
• Wage cycle overlap: Last year's wage hike fell in a Q2-Q3 cycle, while this year's was a Q1-Q2 cycle with most of the impact in Q1. The increase over the last three quarters reflects two wage cycle impacts, though the current quarter's incremental impact is minimal.
• Operational actions partially offset: Some operational actions have been executed well, visible in the sub-con item over the last three to four quarters, but headwinds on other items created a gap versus improvement.
• FY25 margin ambition: Management stated that FY25 should be a year of margin improvement, with a detailed plan covering sustainable medium to long-term margins, pyramid reshaping, automation, subcon, and integration of acquired entities to be shared in April.

Reorganization: New Structure, New Leadership

• Six SBUs from January 1: The proposed reorganization splits the Americas into three industry verticals (Communications, Tech and Media, Diverse Industry Group), with EMEA, APJ, and a newly carved-out India unit completing the six. Delivery is verticalized into eight service lines under a centralized COO structure led by Atul Soneja.
• CEO transition: Mohit Joshi takes over as CEO on December 20. He emphasized that revenue, margin, and organizational plans are being built now, will be tested internally, and will only be shared when credible, targeting April for the full reveal.
• Large deal capability build-out: A large deals capability has been created within each SBU, and the company is also looking at building a central large deal capacity with deal directors and advisors, identifying patterns across deal types including digital transformation, cost takeout, Gen AI-led, and cloud and infrastructure.
• Capital allocation signal: The current 99% payout ratio should not be taken as the norm; the company is reshaping from margin, revenue, and organization perspectives.

Mohit Joshi: "Once these plans have been built, they have to be tested internally. And only then do I want to share them with you. Otherwise, these will not be credible plans, right."

Demand Environment & Vertical Performance

• CME declined more sharply: Communications, Media & Entertainment fell 4.9%, while Enterprise declined 1.6%, reflecting continued pressure on the discretionary services portfolio.
• Manufacturing is a bright spot: Despite the broader slowdown, manufacturing has seen growth across Europe and the US, with the sector historically underinvested in technology now seeing enormous technology investment.
• BFSI presence is uneven: The company has deep presence and incredible success in insurance in the US and Europe, but its banking presence is more limited.
• 5G spending remains distant: Management sees no near-term expectation of a significant pickup in 5G-related demand, though it is hopeful that medium to long-term use cases in manufacturing or travel will emerge.

Mohit Joshi: "I don't think that there is any near-term expectation that there will be a significant pickup in demand."

Deal Pipeline & Conversion

• Pipeline looks healthy, but cycles are long: The pipeline for the second half is described as healthy, though the closure cycle continues to be elongated.
• Large deal momentum improved: Q2 delivered \$640 million in large deals versus a weaker prior quarter, with wins in FinTech, digital transformation, and modernizing legacy telecom networks.
• Historical large deal strength: Management noted Tech Mahindra has been extremely successful in large deals historically, claiming it was the first to do \$1 billion deals ahead of larger peers.
• Acquisition cross-sell opportunity: Some cross-sell opportunities from acquisitions have been utilized, but the possibility of doing more remains, citing a digital engineering services company with strong capabilities in Eastern Europe as an example.

GenAI & Innovation Initiatives

• GenAI studio scaling: The GenAI studio now has almost 60 pre-built use cases, and over 10,000 associates use GenAI-based pair programming.
• New partnerships and products: A partnership with Annyverse targets high-end, hyper-spectral, synthetic data generation for the automobile sector, in-cabin systems, EV platforms, and autonomous vehicle applications. A GenAI-powered email amplifier was launched at the Google Next event.
• Sports tech vertical emerging: Built over the last year, the sports tech vertical has established relationships with BCCI, IPL, NFL, and Mahindra electric car racing, and launched the digital product Fan NXT.NOW alongside the Tech Mahindra Global Chess League. A sports cloud is being built with hyperscalers like AWS.
• Finland innovation centre: An innovation centre was inaugurated in Finland to tap into new-age talent in the Nordic countries.

Guidance & Commitments

Key Metrics