Tech Mahindra Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Turnaround year starts with margin-led beat: Operating margin expanded 110 bps QoQ to 8.5%, driven by Project Fortius savings and operational efficiencies, even as revenue faced seasonal headwinds in communications.
• Telecom decline is slowing, not yet reversing: The communications vertical, which fell 16.5% in Q4, saw its decline narrow to single digits this quarter, though management does not expect an immediate recovery.
• BFSI gains are self-made, not market-driven: A new team and focused account strategy are opening doors at tier-one global banks, but the demand environment remains only "reasonably stable" and the small base means quarterly volatility is likely.
• Cost-out program is quantified and front-loaded: Management targets \$250 mn in annual cost reduction and plans to spend 1.5% of revenue (~\$100 mn) in year one of the turnaround, with progress reported net of investments each quarter.
• What to watch next quarter: Whether the telecom decline continues to narrow, the pace of BFSI account openings, and any decision on wage hikes when management revisits in H2.

Turnaround Mechanics: Project Fortius & Margin Levers

• Fortius delivered, with more to come: The program contributed to a 110 bps QoQ margin expansion, with savings coming from moderation in subcontractor cost and other SG&A areas, partially offset by long-term investments committed to growth.
• Employee pyramid is the structural play: Adding 5,400–5,500 people over the past four quarters improved CNB as a percentage of revenues (including subcons) by about 80 bps YoY, and management calls this one of the largest margin expansion drivers over the medium and long term.
• No wage hikes for now: Management explicitly stated there is no opportunity for a wage hike at this time and will revisit in the second half depending on the financial situation, preserving a near-term cost lever.
• Portfolio company integration is an 18–24 month priority: Two portfolio companies were fully integrated this quarter, and the broader integration effort across systems, policies, and back-office functions is expected to accelerate enhanced offshoring.
• Margin walk detail: Headwinds from Comviva revenue impact (~0.5%) and visa/other direct costs (~30 bps) were more than offset by savings net of investments contributing ~1.2%, though some SG&A reduction is seasonal and will return sequentially.

Mohit Joshi: "I don't want to do the sort of deals that we have to then come back and make plans for magical margin improvements."

Communications Vertical: The Anchor That Is Slowly Lifting

• Decline narrowed meaningfully: From a 16.5% YoY decline in Q4 FY24, the telecom business improved to a single-digit decline this quarter, though part of the Q1 softness is seasonal due to Comviva's H2 skew.
• Comviva drag quantified: The seasonal Comviva revenue decline from Q4 to Q1 created roughly a 0.5% headwind at both the revenue growth and margin level.
• Recovery is a "over time" story, not a near-term call: Management sees telecom as a large enough sector that improvement should happen eventually, but does not expect it immediately; operator priorities remain cost-focused (vendor consolidation, autonomous operations) alongside revenue generation and becoming AI-native.
• Deal activity continues: A leading US-based telco win for wireless network services applications and a UK network service provider deal for country-wide fiber rollout and digital transformation show the pipeline is not frozen.

Mohit Joshi: "I don't see it happening immediately, but surely this is a large enough sector, it should happen over time."

BFSI: Early Wins, Small Base, Real Volatility

• Gains are internally driven: A new team and significant focus on the vertical have enabled TechM to open new clients, including a tier-one global bank that awarded preferred vendor status after a managed services contract win, and to dig deeper into existing accounts.
• Demand environment is stable, not accelerating: Management describes BFSI demand as "reasonably stable" rather than growing dramatically; in the US, spending is improving across asset and wealth management, cards and payments, and insurance, while investment banking and lending remain soft.
• Small base means quarterly noise: Management cautioned that just a couple of million dollars of movement can inject a degree of volatility into BFSI numbers quarter-to-quarter, so investors should not over-read any single period.
• Partnerships gathering steam: Relationships with Temenos and Guidewire are contributing to the pipeline, and the vertical is positioned as a credible challenger in the turnaround strategy.

Mohit Joshi: "I would say that the game set that we are seeing are mostly based on our internal efforts and our improved market positioning."

Deal-Winning Machinery: STG, Delivery Partners & Pricing Discipline

• Solutions and Transformation Group (STG) formed: A specialist group focused on multi-tower deals over \$25 mn in revenue has been set up, signaling intent to compete for larger, more complex engagements.
• Delivery partners deployed to top accounts: Over the past six months, a team of delivery partners has been put in place for the largest accounts to consolidate capabilities from multiple service lines, aimed at increasing the average number of service lines per client.
• Win rate expected to improve: Management fully expects win rates to tick up over time, driven by a combination of increased funnel and more compelling storytelling, including differentiators like being the only large SI to build an LLM from scratch.
• Pricing discipline is explicit: The margin-over-revenue priority means management will walk away from deals that would require later "magical margin improvements," even in the challenged telecom space.
• Client pruning had negligible revenue impact: Deprioritized accounts were marginal from a geographic and size perspective, so the decline in active client count does not reflect a material revenue headwind.

Mohit Joshi: "They need to be competitive from a pricing perspective, but most importantly they need to be compelling, right? They need to tell a really powerful story like for instance, the fact that we are the only large SI or we are the only SI to build a large language model from an AI perspective."

AI & Innovation: Demonstrators, Not Yet Revenue Drivers

• Indus LLM is a technology demonstrator: The 120-crore-parameter model for indigenous Indian languages, built by a 15-person team, is the first among peers, but management candidly stated commercialization models are not well developed and it will not be a significant revenue contributor.
• Bahasa Indonesia LLM follows the same playbook: Built with Indosat on NVIDIA chipsets, this extends the "build an LLM from scratch" credential without near-term monetization expectations.
• VerifAI launched: A new offering addressing validation and assurance for AI systems, with a prebuilt 360-degree framework across the GenAI lifecycle, customizable metrics, and microservices-based architecture.
• AI enablement is broad but shallow: Over 25,000 associates have AI-led pair programming skills and more than 100 AI-based solutions exist across AI Ops, computer vision, and workplace automation, though no revenue or productivity impact was quantified.
• BPS is the AI proving ground: The BPS business is working with hyperscalers and AI-native companies on humans-in-the-loop platforms, infusing AI into contact center solutions, and using GenAI internally for productivity.

Mohit Joshi: "Candidly, the commercialization models are not very well developed now and I do not expect this to be a significant contributor to our revenues. It is more of a technology demonstrator from our perspective."

Segmental & Operational Notes

• IT vs BPO recast distorts comparisons: A segmental change shifted some revenue from IT services to BPO to better drive synergies, making QoQ comparisons misleading; the 600 bps improvement in IT segment margin is an artifact of unallocated costs, with the real improvement at the company-level average.
• Intern reporting expanded: Beginning this quarter, approximately 2,100 interns in the BPS division are included in overall headcount, a reporting change investors should note when tracking productivity metrics.
• CrowdStrike incident was a relationship strengthener: TechM was not using CrowdStrike internally, but provided end-user and desktop services support to affected clients, which management says strengthened existing relationships.
• Hi-tech furloughs are isolated: One or two clients made unseasonal furlough requests, but management characterized this as immaterial and not widespread.
• Advisor Day held in Pune: Research houses and analysts left with a better understanding of TechM's service lines, competencies, and the strategic thought behind the scale and speed imperative.

Guidance & Commitments

Key Metrics