Tech Mahindra Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Turnaround quarter with margin momentum: Revenue grew 1.9% QoQ (0.7% CC) while EBIT margin expanded 110 bps to 9.6%, the third straight quarter of improvement, driven by Project Fortius savings and currency tailwinds.
• Communications showed first sequential growth in five quarters: The vertical grew 2.7% QoQ as Asia Pacific and Europe stabilized, though US telecom stress persists and YoY remains negative.
• Large deal discipline is protecting the margin commitment: Management is explicitly prioritizing margins over deal volume, walking away from bids that require heroic productivity assumptions in out-years, even as the TCV pipeline crossed the \$600–\$800 mn threshold needed for industry-average growth.
• The workforce is diamond-shaped, not pyramid-shaped: TechM has the industry's most experienced employee base, which supports better utilization and pricing but makes pyramid correction dependent on growth; 2,000+ freshers onboarded this quarter toward 6,000+ for the year.
• What to watch next quarter: Whether the communications vertical sustains its sequential recovery, the trajectory of BPO margins as large deal ramp-ups mature, and any wage hike decision from the leadership review underway.

Margin Recovery: The Fortius Engine

• Project Fortius delivered ~70 bps of the 110 bps sequential EBIT margin expansion, with currency tailwinds contributing the remaining ~40 bps; this marks the third consecutive quarter of margin improvement.
• Short-term levers are operational and underway: Subcon costs are being reduced toward a single-digit target, fresher additions are lowering the cost base, and a dedicated pricing tools and analytics program is enforcing entitlement discipline on new engagements.
• Fixed-price contract governance is the next margin frontier: A program to tighten execution, drive change requests, and capture automation benefits on fixed-price contracts is in early stages; management flagged it as a key margin driver over the next 18 months.
• Long-term investments are running in parallel: Spending on graduate trainee infusion, technical specialization, AI-first and cloud-first skilling, and business development for year-three-to-five returns is being sustained even as margins expand, implying the recovery is not coming from investment cuts.
• IT services is carrying the expansion: Margins in the 85%-of-business IT services segment improved through organic efforts, better price realization, fixed-price discipline, automation, and better utilization of the experienced workforce; BPO margins were diluted by portfolio reshaping and large-deal ramp-ups but are expected to improve as those deals mature.

Rohit Anand: "I think we are in a very early stage of that program from a value realization perspective. As we look at the next year and a half, there will be a key focus of our margin driver."

Communications: Stabilization, Not Yet Recovery

• Sequential growth broke a five-quarter decline: The communications vertical grew 2.7% QoQ, driven by stabilization and growth in the Asia Pacific and Europe telecom portfolios, though it remains down 1.7% YoY as key clients continue prioritizing cost savings.
• US telecom remains the stress point: While APAC and Europe have shown stabilization over recent quarters, the US portfolio continues to face client budget pressures from high interest rates and their own balance-sheet challenges; management hopes rate cuts will offer relief and enable a turnaround next year.
• No market share erosion, per management: Detailed discussions with top clients confirm that revenue reductions stem from client budget cuts and some insourcing, not competitive displacement; TechM's unique combination of IT, network services, Comviva software, and BPS is cited as a differentiator.
• The strategy rests on three buckets: Simplify (OPEX cost transformation for clients), Modernize (tech stack upgrades with ecosystem partners like Salesforce and ServiceNow), and Monetize (helping telcos drive revenue growth from their assets).
• Senior talent has been hired specifically for comms: A former CIO of multiple telcos joined for APJ, senior network talent was hired for the US, and additional senior hires are being made for European operations, signaling investment conviction in the vertical's recovery.

Mohit Joshi: "when people are making assumptions about deals that could be, have a five-year type tenure, they are assuming productivity in the out-years, which is not visible to me just now. So, I can only assume that they are making assumptions ahead of the capabilities... We are just not in a place where I am comfortable making those bets because we have a margin target that we have committed and that we have to meet."

Large Deal Engine: Selective and Margin-Conscious

• Deal TCV crossed the threshold for industry-average growth: The quarter's wins exceeded the \$600–\$800 mn range management cited as necessary to drive growth next year, with the last six quarters reading 359, 640, 381, 500, 534, and 603 (in USD millions).
• Discipline is the operating word: Management is being selective about clients and deals, maintaining a must-have priority list, and explicitly prioritizing margins over large deals; they are avoiding bids that require heroic productivity assumptions in out-years that could "come back to bite you later."
• Two new logos landed in BFSI: One is a US-based cards and payments provider for an AI-Ops based production management and tech modernization program, making TechM the 'Change the Bank' partner; the other is a European bank for a Temenos T24 core banking modernization.
• BFSI entry is hard but sticky: Management described BFSI as harder to enter than other verticals because preferred-supplier doors are "closed fairly tightly," but once inside, landing and expanding is relatively easier; differentiated capabilities include Guidewire for insurance, Citysoft for asset and wealth management, and payments experience with issuers and networks.
• Investment in large-deal capability is structural: The organization has invested in deal architects, technical architects, and negotiators, with the sales force focused on must-have accounts; the pipeline is broadening and work is underway to improve conversion rates.

Mohit Joshi: "we have also been very clear about the fact that we will prioritize margins over large deals at this point of time. And we want to be very clear, right, that in this environment, obviously, it is very tempting to do the sort of deals that can potentially come back to bite you later by making what I would say are heroic assumptions about productivity..."

BFSI: Sentiment Improving, Not Transforming

• Revenue grew 4.5% YoY, helped by partnerships with existing clients and new logo signings; the focus is on better utilizing existing capabilities including portfolio companies to build foundations for longer-term growth in insurance, asset management, and payments.
• Sentiment has improved only slightly: Management characterized the demand environment as "a slight improvement in sentiment, but it's not a dramatic 180-degree shift," tempering expectations for a rapid acceleration.
• Two large logos were landed this quarter as part of a deliberate landing-and-expanding strategy; the harder part, per management, is getting through the door in the first place.

Mohit Joshi: "on the whole, I would agree that there appears to be a slight improvement in sentiment, but it's not a dramatic 180-degree shift."

Workforce & Operating Model: Diamond-Shaped and Shifting

• TechM has the industry's most experienced workforce: Management described a "diamond-shaped structure" with a preponderance of experienced employees, which supports better utilization and pricing but makes pyramid correction dependent on revenue growth to bring in more junior talent.
• Fresher hiring is ramping: 2,000+ freshers were onboarded in the quarter, with the company on track for more than 6,000 for the full year; this is a deliberate lever to reshape the pyramid and reduce the cost base over time.
• Attrition is expected to pick up slowly, which management views as helpful for pyramid correction; a new platform has been implemented to capture skill-set requirements across teams for better matching and training.
• Offshore mix is improving continuously: Offshore headcount mix is up ~300 bps YoY, and management expects every quarter to show further movement, though the revenue-mix translation is muted by better price realization, fixed-price governance, automation, and skill utilization.
• A Next-Gen Skill Framework has been created for all IT associates to fuel career mobility, and investments continue in AI-first and cloud-first skilling across the workforce.

Mohit Joshi: "I also want to stress the fact that we have the most experienced workforce in the industry at this point of time, candidly. We have a diamond-shaped structure just now."

BPO & GenAI: Reshaping, Not Standing Still

• BPO margins were diluted this quarter by portfolio reallocation (e.g., the Target business) and large-deal ramp-ups, but the trajectory is expected to improve significantly as those ramp-ups mature and the portfolio mix shifts toward higher-value analytics and vertical solutions.
• The contact-center business is being reshaped away from heavy voice-based work toward analytics engagements with high-tech companies, specific vertical solutions, and crowd-sourcing platforms; management is "paranoid about GenAI impact on contact centers" but argues TechM is better positioned than pure-play BPO peers because of its deep in-house AI and technology talent.
• AI-enabled contact center is a differentiated winning story: TechM's preponderance of technology talent allows it to build AI capability that pure-play contact center players cannot replicate, positioning it to win as the value chain moves up.

Mohit Joshi: "I would be worried if we were standing still, right. But we are not standing still."

Guidance & Commitments

Key Metrics