Tech Mahindra Limited (TECHM.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q4 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani, MD and CEO of Tech Mahindra Limited. Thank you, and over to you, sir.

Good morning, good evening, everybody. Welcome to Tech Mahindra Q4 '22 and FY '22 results Thank you all for joining us today. We are excited, happy regarding our financial performance, and overall, as a company, investing into future. It's been a great year. We started the year, when I look back, with a new framework, which is NXT.NOW. NXT.NOW was really taking into account the next range of technologies, which will lead to business transformation. We took into account some of the unique features of the company, which is communications, content, creativity through BORN or Pininfarina, and also on commerce, which is really how to help our customers grow. Now this 4C focus, I think has worked well for us, and our theme of NXT.NOW, which is basically to be agile to anticipate the future and do it now, has worked well. Just to give you an example, February, our leadership did a simultaneous launch of TechMVerse in Barcelona as well as in Hyderabad. Again, very, very well received. And we believe that today our use cases are helping many, many customers, a few people on commerce on MFT, a few people who are looking at creativity, a few people who are looking at solving business challenges in retail sector, or, in some cases, working on the content again, which is about the teaching platforms or education or simulation for the sports. So your company will focus on 5G, will focus on the Wave 2. Wave 2, as you know, is an internal program which looks at data flow from IoTs, from various devices, from various other sources and how the data is managed, how the data is -- not only managed through conventional tools and platforms, but also through AI, how the data goes through edge computing or data centers or the cloud, and how we are able to secure the data. That journey for us is Wave 2. And I think, overall, NXT.NOW has resulted in good results and good value creation for our clients. Company, overall, signed more than $3.3 billion of large deals. We saw some of the very big, large deals in -- mainly in CME and BFSI. We are lucky and happy that our 5G investments are now yielding results. Our cloud business is growing very, very healthy. Overall, I can say that FY '22, as Rohit tells me, is that it's one of our best years in 7 years. So I can only say is: so thank you all of you for supporting us in FY '22, supporting us in the previous years. I know Q4 results take us to almost a $6 billion company, constant currency growth of 5.4%. Overall, deal win -- large deal win of billion plus. CME business growing over the last 6 quarters consistently. I am only glad that I have a great team. And I have this leadership team right on this call. So thank you for your support. The Board recognizes that our capital allocation should continue to reward the shareholders in short term also. So the Board has recommended the final dividend of INR 30 per share in addition to INR 15 per share, which was earlier given as interim dividend. My focus for FY '23 and my management team's focus is organic growth, continue to look for improvement in our EBITDA improvement programs, and continue our focus on Wave 2 and Metaverse. Connectivity, Wave 2 and Metaverse will continue to be our focus, leading to business transformation. I want to thank you all for attending the call. Handing over to Milind and Rohit to update us on all the financials. Milind, over to you.

Thank you, C.P. Good evening and good morning depending on the time zone you are in. Let me cover the company financials for the quarter ended March and for the year in little more details. We ended quarter with a revenue of $1,608 million versus $1,533 million last quarter, a constant currency growth of 5.4%. And as C.P. alluded, balanced growth with CME vertical growing at around 4.8% and Enterprise growing at 5.8%. Another quarter -- we had another quarter of a strong deal win with TCV exceeding $1 billion for the second time in last 2 years. Now overall, increase of about 50% plus in the -- over the previous year in terms of TCV win. Revenue in rupee terms was about INR 12,116 crores versus INR 11,451 crores, which is a 5.8% growth in revenue terms -- in rupee terms, sorry. EBIT for the quarter was about $211.5 million versus $228 million in Q3. EBITDA margin for the quarter was 17.2%, lower by about 80 basis point compared to the Q3, partially on account of lower utilization, which is in view of the recruitment which we have done for the growth and juniorization; salary and retention related impact, because the cost -- I mean the supply side pressure still continue; and there was some one-times, which were there in last quarter, which obviously have not got repeated in the current quarter. Then, there was an additional charge of about 80 bps on account of depreciation and amortization. Depreciation because of additional investment in the hardware and software which we have done in the current quarter, and amortization resulting from the acquisitions in the quarter 4, where the impact for the -- impact on the -- in terms of cost was for the full quarter, but the benefit we got was for part of the quarter. So moving below EBIT line. Our other income was higher at about $42 million compared to $30 million in the last quarter, and the increase was mainly contributed by the ForEx gain, which was about $27.8 million versus $17 million in Q3. We continued to follow the hedge policy which the Board has adopted last many years, and that consistent hedging has helped us to deliver good returns over the period. One redeeming feature for this quarter was that tax rate was about 17.5% as against 27% in Q3, and this was on account of onetime reversal of tax benefit -- tax provision related to season benefits. And that is a result of 2 factors: one is the pickup in the investment in plant and machinery in last year, and our decision to opt for a new tax regime from FY 2022, which means the investment that we will do in the next 3 years will be available for the utilization of seasoned investment reserves till FY '21-'22. Now, under new -- we will be under new regime, as I said, from FY '22 onwards and our normalized tax rate for the company would be in the range of about 26%. The net profit margin for the quarter is 12.3%, which is an increase of about 30 bps over the last quarter. Free cash flow for the quarter is about $111 million, which is 56% of PAT, lower than the last quarter. And that was -- the cash flow was impacted because of the additional hardware investment that we -- hardware and software as well as some OpEx payment which we had to make for the future. And so these -- some of these benefits you'll see as we go along in the coming quarters. Our DSO days, which have increased last quarter, have improved by about 4 days to 97, and we hope to continue on that movement. Going to full year performance. The revenue for quarter, we almost are $6 billion, as C.P. alluded to. We were at, I mean, $5,998 million, a growth of 17.3%. During the year, our Communication business grew by 17.2%, while Enterprise business grew by 17.4%. In the Enterprise, technology and BFSI were major growth drivers for the current quarter. And when it came to C -- coming to CME, the 5G revenues helped us to accelerate the growth there. EBIT margin for the full year at 14.5%, which is about 30 bps improvement over the previous year. In absolute terms, EBIT for the year was $872 million. Our EBITDA for the year was $1,076 million, a margin of 17.9%. In terms of our other income, other income for the year was $149 million, significantly higher than the previous year because of higher ForEx exchange gains. ForEx gains was about $75.5 million this year as against $12.6 million last quarter. Free cash flow for the year -- full year was about $595 million, about 80% of the PAT for the year. C.P. said the Board has declared a final dividend of INR 30 rupees per share, and with an interim dividend of INR 15 rupees per share, we will -- dividend will be INR 45 per share, same as last year. As I said, we continue to follow our hedging policy consistently. Our hedge book was about $2.2 billion, almost similar to last year, and MTM gains as on 31st March were about $571 million, of which $16 million have come to -- have been taken to P&L and $55 million are in the balance sheet based on the accounting that we do. Okay. In summary, I would like to reiterate that we are taking the right steps towards transforming our operation as we continue to focus on growth momentum moving in the new fiscal. With this remark, I will now open the floor for questions.

[Operator Instructions] The first question is from the line of Nitin Padmanabhan from Investec.

So first is on -- I had a couple of questions on margins, actually. In the last quarter, our SG&A was around 12.1% of revenue and you had suggested that it could go closer to 13% on a sustainable basis. But this quarter also, it seems to be just about there. Is there any specific one-off there? Or how should we think about this particular cost side too?

So Nitin, for convenience, I'm going to request Rohit Anand to coordinate all the question and answer. So Rohit, can you take over, please?

Yes, yes. Sure. Yes. So Nitin, from a quarter-over-quarter perspective, there is absolute increase of $10 million in the SG&A spend. While as a percentage, yes, we've not seen that increase so much come through. But nothing from a dramatic one-off that we see this time versus last time, which is reflecting from a P&L standpoint.

Sure. And from a margin perspective, overall, if you look at EBIT, how should we think about it on a going forward basis. I think you mentioned something on depreciation. If you would give a broad color on -- puts and takes on margin and how we should think about it on a going forward basis?

Yes. Sure. So I think from an EBIT perspective, maybe the way to think about it is from where we are. Let's look at a little bit of recap. I think from the year perspective, we've had 14.6%, right, at an EBIT level based on some of the charges that came in, in 4Q, which I'll talk about. I think barring that, we were very close to the range that we had outlined for the year. So we're in the ballpark. And we look at as we move forward, right, and where we are from a quarter perspective. What has happened through the year is the salary -- sorry. Can you guys hear me properly?

Yes.

Yes, sir, you are clearly heard.

Yes, we can.

Okay. Okay. So what's happened through the year is the salary cost and the retention based on the -- the supply side pressure has continued. And we've also seen in the second half a little bit of advantage come through for price, but that's lagging the cost increases dramatically. So as we move forward, when you look forward, one of the big levers that we'll continue to work on with our customers is going to be price increase, right? So that's one looking forward from a margin standpoint. Second, we've invested consciously in the last 2 quarters for future, which means we've invested in juniorization. We've done a lot of fresher hiring. And that's the long-term impact we want to get to bring our average resource cost down, right? But that gives a short-term impact. So our utilization has gone down if you look at that from a 2-quarter standpoint. We were operating at almost 87-plus percent, which has gone down significantly. As we look at the future, there is an upside on utilization that will play out, right? So that's the second broad trend that we look at it, right? Third, I think we're continuing our journey on offshoring. I mentioned that multiple times before. As we look forward, I think we see a definite improvement opportunity for us available on doing more and more offshoring. And short term, the demand because of travel restrictions, et cetera, has also been fulfilled onshore. And that as the -- a lot of deal wins that we've won, the work will start getting transitioned to offshore. So that will be an opportunity that we'll see. If you see our subcontracting costs, right, that's another lever. That's gone up to get the growth that we've been able this year. But as we stabilize in those programs, as we get maturity, we'll continue to work 2 things. One, wherever the resources [indiscernible] to be onshore, those subcons will be replaced by on-site people who are full-time head count, and also there, we'll play the -- in terms of how do we hire the right fit candidate. That will give us an advantage from a cost benefit by substituting subcon to head count, right? So that's another lever that will play for us. And then we -- this also I mentioned in the past, and we're continuing pursuing it. We're trying to look very strongly on geographies that are low margin for us, countries that are not giving us the return we want. We're taking conscious effort on taking those portfolio out which doesn't fit strategically, which is not giving the return, one, by organically not focusing on that; or second, package it from our perspective -- so seeing that "can we make a better realization for somebody else there," right, versus the fit-ment to our portfolio. So those efforts in our perspective will give a better business mix as we look forward and give us upside from a margin perspective. So these are the levers as we look forward will continue to work for us. And you know well, right, from a supply side perspective, salary cost, travel coming back, some of the facility costs while we continue to work on a hybrid model, those will be the headwinds for us. But given this and the growth prospects, given how the deal wins have been and what the pipeline looks like, it makes us continue to believe we'll continue to progress as we go sequentially to the quarters for the year to improve our margin story as we move forward.

The next question is from the line of Pankaj Kapoor from CLSA.

So Rohit, a question on the revenue outlook. If I look at this year, you have added over $700-odd million of organic revenues. And now for the next year if I see -- the date booking this year, of course, has been 50% higher than last year. So how should one think about the incremental revenue addition on an organic basis for next year? Do you think we should sustain this level? Or it could be even better than this?

Pankaj, I feel more -- I mean, obviously, we don't give guidance. But I can give you some trends that we're seeing from a market and our vertical perspective that give a flavor of what the future is, right? So Communication, right, you've seen that grow consistently over the last few quarters. So that -- from our perspective, deal wins that you see in the quarter is almost $600 million plus of the $1 billion that we got in the fourth quarter, including a significant win that C.P. also mentioned on the 5G space. So Communication with all the levers that we said on 5G are kicking for us. So that will continue too, including the pipeline that we see, that will continue to fire. So that's a positive for the year from a momentum standpoint. Second, if you look at Enterprise. From the different vertical perspective that we've articulated before, technology continues to be a positive momentum for us, while we saw some quarterly fluctuations in the last one. But as we look going forward, that's another area that consistently will grow for us similar to last year. We're seeing a ton of opportunities in the technology space. So that's the second area where we're seeing demand continue, right? And then you've seen BPS. BPS has grown significantly for the year. And when we look at the way we are bidding for deals, the way the opportunities are stacking up, that's another area where we continue to offer better solutions to our customers. And you know we've also done a lot of solution capability adds in our BPS segment, including consulting -- getting earlier in the cycle from a BPS process perspective. So that all from a go-to-market perspective is coming together for us to give us better leverage and new deal wins. So that's another area that we continue to see positive momentum. And then the whole customer experience area, the XDS pillar that Dilip Keshu leads, and we've been talking about that. That continues to help us a lot on giving the positive side on deal wins. And a lot deals that we win which gets reported, they play a very active role in helping overall solution on customer experience standpoint. So I think from a momentum standpoint, as we were last year same time, our pipeline is looking good. Our deal win momentum is similar. We ended the year last year with a similar deal win, and that's the same position we're in. So that's kind of from a demand standpoint, Pankaj, that we've seen. Geo-wise, you see in Europe, we made some leadership changes there. We put different leaders. We articulated it that segment was slowing down for us. That gave us a positive momentum in the year. We've done similar changes in the Americas segment. And that, again, this year, from a geography mix standpoint, we aspire to continue to grow.

Fair enough. Any headwinds you see, maybe not immediately, but in the second half given the kind of macros that we have?

So difficult, Pankaj, to kind of really outline right now. What we're seeing is visibly the pipeline. The pipeline continues to be strong. I mean there could be certain short-term pressure on costs that might come at a client perspective, but it's also an opportunity for them to use our capability to even give them better structuring -- long-term structuring of their cost, right? So it's an opportunity for further offshoring for some of the clients, right, because they get the cost pressure. So it will play out from a short-term, medium-term perspective. We are proactively working with customers early to give the right solutions upfront so that they can think about what is bothering them instead of having kneejerk reaction. So I think those discussions are early in the phase, but overall we're not seeing too much reactions come through. Maybe I'll just ask Manish and Vivek for their segments, and Jagdish, if they want to quickly comment on what they feel in their segments.

Sorry. You want me to go first, Rohit?

Yes, Manish, why don't you go first.

Yes. No, absolutely. I think the overall trend as we have been seeing through the year, through the last year, has continued to play out exactly in that fashion, which is the digital transformation driven by 5G and the need to be ready for 5G revenue growth whether in the consumer realm or in the enterprise. That continues to drive the transformational activity within the telecom ecosystem. What also continues to drive growth for us is the adoption of cloud. That is also a pretty solid secular theme across the world, and that's largely for transforming their existing stack as most of it will continue to drive the digital transformation as they adopt some new software as well. So I think those 2 broad themes will continue. What has also been helping us over the last year or so is the investments that we have made in our digital engineering capabilities. And that's as well helping, where now we are in a pretty good position to provide engineering capabilities in the Metaverse ecosystem from network to devices to applications and use cases, or, for that matter, offering software product development and capabilities therein. That's also another solid theme that is continuing to emerge. And like Rohit said, there will be some pressures because as the economy evolves, there will be pressures to try and conserve some cash. But the broad demand sentiment remains that the telecom ecosystem has benefited a lot over the last 18, 20 months by digitizing as much as they can, and we believe that, that process will continue. And we are -- we continue to have that privileged access rights across all the major operators for us to get a pretty good view of what's happening from some of these transformational projects to be able to take advantage of whether it is in the network space, in the infrastructure cloud space or in the software transformation, all 3.

Vivek?

Yes. So I think just from a BFSI perspective, we had a good year with a 19% year-on-year growth. And that, obviously, takes us on a certain trajectory as we look into next year. Q4, obviously, included the CTC acquisition. And as we explained it at the last earnings call, with that acquisition, we've now created a stand-alone focused team to drive insurance growth and drive synergy with the new acquisition. And we're making good progress there. And I think just reiterating what Rohit and Manish said in different context, that we do continue to see robust demand. I mean there isn't any impact on the wider economic issues or the war on the demand scenario right now. Jagdish?

Sure, sure. So I think -- overall, I think -- a couple of things that are playing out to our strength, I think, overall for the Enterprise business, but I guess for the whole company as well. Large deals. Specifically, I think we've more than doubled in our performance from last year to this year, and I think augurs well in terms of what we see as an opportunity. And we aim to add at least $1 billion revenue next year and we add about $1 billion of deal wins each quarter, is what we're trying to go to and maintain that momentum, which should show a good number of sequential growth. As far as the verticals are concerned, especially on manufacturing and high-tech manufacturing, as you know, for us includes auto, discrete, oil and gas, and utilities, all of them have shown more than double-digit growth this year. We are also progressing enough to be able to -- manufacturing for us is very close to BFSI in terms of $1 billion vertical. So we should hit that very, very soon. And the rest of them in terms of high-tech, et cetera, should start entering that league at the end of the year as we get into that kind of a run rate, at least upwards of -- sequential growth-wise, upwards of high-double-digit towards high-teens. So bullish on large deals, bullish on the vertical growth. And as we said, primarily transformation towards revenues from Americas and Europe. That's where we are seeing most of the growth happening.

The next question is from the line of Sandip Agarwal from Edelweiss.

I have only one question. How you are seeing the demand for telecom and enterprise evolving? Do you see the telecom demand, particularly in the 5G, will take over the demand in the enterprise side? Or you think that it is too early to call that out?

Rohit?

Sorry.

You want me to take that one?

Sorry, sorry. I was on mute talking. I apologize. I think Jagdish and Manish just articulated that. But maybe quickly, Manish, if you want to just add anything to what you just explained.

Yes. I think if I understood the question. Your question is will 5G in enterprise overtake the demand in enterprise from other digital transformation areas.

No, I just wanted to understand whether going forward, you see more demand in 5G coming in. Or you think that Enterprise business will equally grow strongly or it will be ahead of telecom. What is the sense on that? And also, if I can add another question on the attrition side. When do you think that the attrition will cool off? And where is more attrition? Whether it is more in enterprise or in telecom?

Okay. So I think let me comment on the growth. I think I did -- in response to the previous question, I did highlight where we are seeing the demand sentiments coming from within the telecom ecosystem. And that, like I said, is largely -- and we've been consistent about it, if you recall that -- this is a wholesome, very comprehensive digital transformation that is underway. And digital transformation in the telco realm is not just about changing the front end or changing some BSS systems. It goes all the way back into the way the networks are operated, and before that, how networks are built and how the network compute happens now going forward with a cloud-based model. So in totality, it is a complete transformation that is underway. And we believe that this momentum of where the need for continuing and completing at least this phase of the digital transformation is going to still continue to play out the next 12 months also. Our pipeline reflects that. Our current advanced conversations with various operators indicate that. And clearly -- what is driving most of that digital transformation is clearly the power of 5G and 5G protocol that will allow the operators to offer services to their enterprise customers, to their partners and to their consumers slightly and very differently with what we have done in the previous generational wireless technologies. So that's going to continue. As far as the enterprise commentary is concerned, I'll hand it over to Jagdish and Vivek, because I think they've given you broad answers about how the growth cycles will be. Jagdish?

Jagdish, if I may. Sandip, I think to your exact question, I think -- the great news is that, as Manish articulated, that's 40% of the business. We are seeing great demand driven by 5G and everything else. I think on the enterprise side, between what Jagdish and I said, high-tech BFSI continued to grow very well for us. So it's a healthy competition between the 2 parts, right, that, where can we outdo each other from a growth perspective. But the demand scenario is pretty robust across the board.

And on attrition, I mean, there's no specific trends between the verticals, but it's more driven by the skills. Certain high skilled, niche skills, we see that trend higher. That's the general trend, but not across the 2 segments. I don't know, Harsh, if you want to add anything? We've seen improvement on attrition sequentially quarter-over-quarter at a point of time, while LTM continues to be flat. So that trend is improving. But Harsh, you can comment if you're on the call.

I don't if -- can you hear me?

Yes, we can hear you, Harsh.

Okay. Great. So Sandip, thanks for asking that. As you would see our trend, we've actually bucked the trend by showing a flat on attrition this quarter in the last 12 months. But if you really look at our annualized -- quarterly annualized number, we've seen a considerable downwards trend. Now obviously, that means that all the efforts that we had put in place about 4 quarters ago or 3 quarters ago, seem to be paying off now. As Rohit said, we don't see a particular trend between CME or enterprise. It's more skill based as well as tenure base. So obviously, at the junior level, you'll probably see it slightly higher, as has always been the trend. But the real good news is that our quarterly annualized number is actually coming down, which is really bucking the trend from last few quarters, as well as from what we see in other companies. So that's a very healthy sign for us. And we do believe that all the steps that we have taken at Tech Mahindra will ensure that this downward trend continues and the stabilization of attrition happens.

The next question is from the line of Surendra Goyal from Citigroup.

Rohit, I just wanted to know when the next wage hike cycle kicks in? And secondly, do you expect the Comviva seasonality to impact margins in the coming quarter?

Surendra, sorry, I didn't get the second part of the question. Could you just repeat?

So I was talking about the Comviva seasonality in the business, and do you think that will impact the June quarter margins?

Yes. So from a salary hike cycle perspective, while we'll be doing some -- we're already doing some sequentially in batches, but the main cycle for us is going to be July. And from a Comviva perspective, we've structured the business, where we've over a period of time reduced the seasonality impact that we typically saw in the last few years. While it will be still there from a June quarter standpoint, but be relatively lower than what we've seen in the past.

Sure. Could you also comment on visa costs? Any idea about the quantum and timing of that for you?

Timing usually is going to be the current quarter, Surendra. And from a quantum standpoint, say, it will be maybe an impact of 30 -- 25, 30 basis point from a margin standpoint.