Tech Mahindra Limited (TECHM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tech Mahindra Limited Q2 and FY '27 Earnings Conference Call. We have with us today, Mr. Mohit Joshi, Managing Director and Chief Executive Officer; Mr. Rohit Anand, Chief Financial Officer; and Mr. Atul Soneja, Chief Operating Officer. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Mohit Joshi for his opening remarks. Thank you, and over to you, sir.

Thank you, and thank you all for joining us, and welcome to our Q2 FY '27 earnings call. I just wanted to begin by highlighting a significant milestone in Tech Mahindra's journey. As we celebrate our 40th anniversary this quarter, a very proud moment for associates, customers, shareholders and partners. Over 4 decades, we have built deep plant relationships, developed expertise across industries adapted through successive waves of technology change. From our roots in telecommunications, we have grown into a global technology company offering AI part technology consulting and digital solutions to global enterprises across industries. Through all this change, the entrepreneurial spirit that shaped Tech Mahindra has endured. It drives us to pursue new opportunities build for the long term and keep learning at our heart. We believe the technology must create meaningful value for our clients and communities. Today, that spirit finds its clearest expression in our promise to help clients scale at speed. As we mark this milestone, I'm also pleased to announce that our Board of Directors has recommended a bonus issue bonus share issue in a ratio of 1:1 for our shareholders. Turning to our quarterly performance. We delivered a very strong quarter with broad-based growth across the business. Revenues were USD 1.63 billion, representing 6.8% year-on-year growth on a reported basis and 7.2% growth in constant currency positive momentum across our verticals and the ramp-up of large deals supported this performance and we are now winning share based on our talent investment and their focus. We have above industry tenured staff focused on delivering business outcome-oriented solutions to our clients. Operating margins for the quarter stood at 14.8%. From a vertical perspective, in communications, revenues grew 9.5% year-on-year supported by the ramp-up of the O-RAN large deal and new strategic engagements. We continue to see opportunities across AI-led operational transformation, fiber and network modernization and B2B platform modernization. We also believe the next wave of cost transformation will be driven more by technology-led transformation beyond merely AI benefits and labor arbitrage which placed to Tech Mahindra's strengths and deep telecom expertise. In this quarter, we launched Zero Gravity Telco Architecture, our North Star framework, enabling telecom operators to reduce enterprise gravity by addressing the architectural constraints that limit safe AI agent deployment, supporting their transition to AI-native operations. This is a timely and differentiated capabilities, especially in light of widespread and heightened concerns about security and reliability of AI agents. The BFSI business grew 4.6% year-on-year. We remain focused on deepening our presence in payments and wealth management modernizing client platforms and strengthening our insurance capabilities. During the quarter, we were recognized as a global leader in the ISG Guidewire services ecosystem, 2026 study for the first time, reflecting the progress we have made in insurance. Manufacturing grew 7% year-on-year. Aerospace saw good traction supported by engineering demand and industrial opportunities centered on AI-led efficiency, supply chain visibility and system consolidation. Hi-Tech grew 6.7% year-on-year, supported by new deal wins, AI-led product engineering and platform modernization and driving demand. At the same time, cost optimization and consolidation initiatives continue to support a healthy pipeline. Retail, travel and logistics grew 9.2% year-on-year, supported by new client wins and the ramp-up of consolidation and transformation engagements in the Americas. We continue to see opportunities to expand our share within existing accounts and help clients strengthen the infrastructure, data and platforms needed for AI adoption. Healthcare grew 6.2% year-on-year. Our focus remains on expanding our presence across providers and life sciences with vendor consolidation and AI-led transformation as key areas of opportunity. We are building on our AI solutions portfolio and ecosystem partnerships to support clients in areas such as post-market surveillance and regulatory compliance. Coming to the progress we made under [ tech ] and Helix, our AI initiative this quarter. We strengthened the platforms, partnerships and industry capabilities that underpin all of our AI offerings. Our Helix investments are translating into strategic engagements across industries and geographies with many moving beyond pilots towards larger scale implementation within core business processes. During the quarter, we secured AI engagements across professional services, health care, insurance, communications, consumer health and technology. Let me share examples to illustrate how clients are approaching AI as part of the broader business transformation. Our European professional services firm, for instance, selected us to embed AI and genic AI across more than 40 customer-facing platforms and products and modernized software engineering, displacing a long-standing incumbent. Secondly, our U.S. health care technology leader engaged us to deploy a multi-agent AI solution across its post-market surveillance, complaints life cycle, accelerating triage while preserving traceability, regulatory governance and expert oversight. And thirdly, an APAC communication and media provider selected us to transform customer experience operations, embedding AI agents across voice and digital interactions, agent assistance, quality and knowledge management. For us, the opportunity being enabled by our latest offerings is not simply to deliver existing work more efficiently, but to take on a wider scope of responsibility and help clients achieve better outcomes. Helix brings together our industry knowledge, engineering expertise and enterprise integration capabilities to support this shift. I will now share 3 examples of how Helix is bringing together our industry knowledge, engineering expertise and enterprise integration capabilities to deliver changes. Our work with AWS demonstrates this in practice. We launched an Agentic Process Transformation Center of Excellence, whose first solution collections grew, is already deployed at target group and delivers approximately 40% efficiency gain in arrears management, a measurable improvement in a live business process. Secondly, our Zero Gravity Telco Architecture is gaining traction. Our Tier 1 U.K. operator is progressing a proof-of-value trial to European mobile network operators are valuating adoption and a leading Asian operator is deploying pilots. The company Zero Gravity [indiscernible] benchmarks, readiness and guides investment priorities while collaboration with hyperscalers NVIDIA and TM Forum supports adoption. Potential benefits include reductions of 50% to 80% in time to market, 15% to 30% in technical debt and 25% to 50% in architectural costs. Thirdly, we launched a consumer Agentic Experience Studio, an immersive center showcasing end-to-end solutions across the consumer industry value chain. Since its launch, it has hosted more than 20 customers and multiple partners and begun generating business in its first quarter of operations. This studio has also helped us deepen our partnerships with Google, SAP and [ Blue Yonder], strengthening our cloud AI digital supply chain and enterprise transformation capabilities. Our broad partnerships complement these investments with the integration and security needed for enterprise deployment. They also help us develop capabilities that can be applied across client engagements and announced over time. Here are 4 examples of additional work with -- here are 4 examples of additional work with partnerships. With ServiceNow, we have announced an expanded multiyear partnership well as enterprises move from AI pilots to production scale deployments. With Cisco, we announced an AI-driven security service edge offering to reduce security complexity, improve visibility and control and help enterprises manage and secure AI agents as they scale, cloud and hybrid work and the AI adoption. Our partnership with SpaceXAI combines industry expertise, engineering excellence and AI innovation to bring organizations -- to help organizations transform software development into a competitive advantage by bringing together SpaceX's AI native platform and take minus deep remain knowledge [indiscernible] and transformation expertise. This partnership reinforces our AI delivered [ right ] strategy. Finally, we continue to invest in technologies to the longer horizon, [indiscernible] makes 12 anniversaries this quarter remains an important part of this effort. In Quantum Technologies, we partnered with [indiscernible] Technology Foundation to develop [ middleware ] for India to [indiscernible]. Completion is expected by December 2026, with commercialization activities expected to [indiscernible]. We also won the first [indiscernible] paths and the Fifth [ quantum ] hackathon organized by possibly the world's leading quantum institute with the National Quantum Computing Center, working alongside talented university participants to tackle our network optimization challenge using quantum computing. Coming to deal with our total demand for the quarter were USD 1.023 billion. Wins are broad-based across verticals and geographies. For instance, we were selected by a leading Canadian insurer, a strategic partner for an integrated application management services engagement, spanning core insurance applications, vulnerability management, environment services, release engineering and run operations, the engagement with strengthened platform organization, improve operational efficiency, strengthen security and enhance our capability. We were selected as a leading digital -- leading digital network business to deliver a transformative mainframe to a service program supporting to communications leveraging Tech Mahindra's infrastructure transformation, managed services, automation and telecom expertise. The engagement will help deliver reliable connectivity services across the U.K. We were also selected by a leading Australian telecom operator as a strategic managed services partner for a 5-year engagement, spanning application management development, testing and AI engineering services. This is obviously enabled by our proven experience in AI engineering services and managing mission-critical technology environments. I will close where it begins with our talented staff. None of what I have described happens without them. We were recognized this quarter at the Brandon Hall HCM Excellence Awards and the Stevie Awards for great employers. These recognitions are important, but what matters most is the work behind them. Company building for the future must invest not only in technology capabilities, but also creating meaningful opportunities for people to learn, contribute and grow. I wanted to close with our global [ Chesney], Season 4 in Bangalore, which delivered 9 days of world-class [ chess ] shares and a truly global audience. [ Chess ] brings together imagination, discipline, patience and adaptability, rewards the ability to look beyond immediate move while responding thoughtfully to a changing position. As Tech Mahindra completes 40 years, those qualities offer a fitting perspective on the journey ahead. We will continue to build on our strengths, learn all that while staying focused on the commitments we make. Also, on the GCL [indiscernible], I just want to mention that through the -- through our GCL app, we have also transformed how audiences connect with the sport while bringing together leading partners, including SBI, AMD, [indiscernible] and many others. And with that, I will hand you over to Atul who will take you through our operational transformation and progress for the quarter.

Thank you, Mohit, and hello, everyone, and thanks for joining in. So AI is reshaping the economics of technology services. The market is rapidly moving from AI experimentation to enterprise scale adoption. Our focus at Tech Mahindra is to help clients translate AI investments into measurable business outcomes through improved productivity, accelerated innovation and sustainable value creation while embedding AI into a structurally more efficient delivery mode. With Helix, our AI journey is moving decisively from capability building to scale execution. Helix is becoming the agent for AI-led transformation across [ Tech M], connecting innovation to execution, productivity and growth. Our strategy is to build an AI growth engine under Helix, which has 2 complementary dimensions: AI tool chain for every service line, which is around embedding AI into how we design engineer, modernize, deliver and operate technology services. And second is around AI transformation for every vertical, which is around applying AI to reimagine industry-specific business processes operating models and customer experiences. Let me just give you a few concrete examples. An example of AI tool chain is when a Tier 1 telco operator in Europe expanded its partnership to build a private cloud platform using platform engineering and AI-first operations. The strategic relevance is that AI becomes embedded in the operating fabric of client infrastructure creating a scalable foundation for productivity gains, automation and long-term business value rather than a stand-alone technology initiative. An example of our cross-service AI foundation tool chain is TechM Orion and the Orion marketplace, which leverages TechMs AI IP and reusable agent capabilities enabling service lines to accelerate AI adoption from a common platform rather than building solutions independently. Let's now consider the AI transformation for every vertical. For telecom, we established a Zero Gravity Architecture, which enables a diagnostic framework to help telcos overcome legacy complexity and move towards autonomous operations. We partnered with [ FICO ] in banking domain for AI-powered decisioning and manufacturing, we partnered with infinite uptime to bring prescriptive intelligence into [ planned ] workflows. These examples show a progression from generic AI capability to industry-specific intellectual property solutions and transformation offerings. Our Zero Gravity Architecture for telecom is an example of the above conversions. It brings together AI-ready architecture, enterprise context and agent tech capabilities to simplify complex telco environment and enable intelligent operations across networks, customer journeys and business processes. Our customer Agentic Experience Studio accelerate solutions across retail, consumer travel and logistics. Our model strategy is evolving into a family of multimodal purpose-built models, and Orion provides a model agnostic enterprise AI platform that brings together these capabilities across a growing partner ecosystem. Our portfolio includes more than 200 AI assets, which we are rationalizing into reusable blueprints, platforms and accelerators. During the quarter, we completed 25 prioritized industry and horizontal AI use cases while progressing more than 100 additional vertical use cases across communications, financial services, health care, manufacturing, retail, energy, insurance, travel and logistics. Last time, we spoke about domain-specific language models. Our focus was on establishing the foundational capability to build smarter, efficient and specialized AI models to ensure our customers get the benefit of doing a specific task in the domain or a sub-domain effectively. Since then, we have extended this capability, and we are now seeing opportunities in 3 separate directions. First, [ DSLMs ] are now part of AI tool chains. [ DSLMs ] enter these AI tool chains as an important component, which helps us deliver these transformations, keeping them cost effective. Our AI tool chains built specifically for industries, now have these DSM embedded within them. Second, from language models to agentic business processes. Our focus is no longer just on building a model that can answer industry-specific questions. We are combining DSLMs with AI agents that can understand enterprise processes, reason over domain information and take government actions within customer environments. And third, from technology development to commercialization. We are connecting our domain-specific AI capabilities with our broader agentic AI platforms, industry solutions and deliver ecosystem for repeated enterprise offerings. In short, we have progressed from building models to building domain-specific intelligence that can drive business actions. That is where we believe the long-term value creation opportunity lies. Trust is a fundamental to scaling AI. Responsible AI is embedded throughout the solution life cycle with red teaming, trusted data, traceability, security and IP providence built into how we design, deploy and operate AI solutions. We have also established a dedicated responsible AI practice, spanning across consulting delivery and talent enablement, which is helping us strengthen our ability to help clients move from experimentation to production with more confidence. We are also moving decisively from co-sell to co-create which is around combining Tech Mahindra's domain depth, engineering excellence, deep plan relationships and global delivery scale with inherent the strength of our partners to build differentiated solutions and unlock greater client value. This is already taking shape through cloud and AI innovation with Google Cloud, AWS and Microsoft. Intelligent enterprise transformation with SAP ServiceNow and Salesforce, AI in infrastructure and edge solutions with NVIDIA, Dell, Intel and Qualcomm. Across these and many more partnerships, we are not no longer simply taking products to market together. We are jointly creating industry solutions, talent, [indiscernible] and new sources of measurable business value for our clients. The impact is visible across industries. In banking, AI-enabled service operations are supporting stronger conversion and growth. In health care, multi-agent workflows are addressing high-volume product safety processes while keeping specialists in the decision group, in insurance and telecom, AI ops, self-healing operations and embedded agents are improving responsiveness and operating efficiency. In engineering, AI assisted development and testing are shortening cycle times and improving release readiness. AI is not only transforming client operations, it is also redefining the economics of service delivery. Across client fixed price and outcome-based program, we are intensifying the use of AI to improve productivity, optimize delivery effort and strengthen execution economics. Our focus is on systematically and building AI into how work is delivered, enabling us to deliver more efficiently, improve margins and scale proven practices across the account base. Our biggest currency is our talent, which continues to scale alongside execution. More than 24,000 associates have been upskilled on AI productivity tools. Over 4,500 have been skilled on agent platforms and approximately 48,000 whole and AI certification. We are now moving beyond broad-based AI enablement towards specialized client-facing capabilities through forward deployed engineering teams. AI velocity sells, a new program we started to bring these capabilities closer to the client demand has already delivered 16 relevant client-relevant capstones in 7 weeks and operating at full allocation. These teams are designed to demonstrate value quickly and successful solutions across our service lines. As the world moves towards smaller domain on textile models, it is imperative that our workforce gets trained on it because of the multitude of open models. We have curated a special internal cost to ensure 200 engineers get trained in the next quarter on some deep techniques to home models and harnesses. Let me also address the broader economic implications of AI for our industry. AI is and will change the economics of technology services. In some areas, automation will reduce the effort required to deliver existing services and may put pressure on effort-based revenue models. But we are also seeing significant momentum in work related to consulting, modernization, data and analytics, other clients [ afraid ] their AI journey. All of this translates to expanding scope within existing clients, accelerating transformation demand, supporting higher volumes, winning new clients and evolving our new commercial models. This positions us to participate more directly in the value we create for our clients rather than measure progress only in units of effort. Let me close with our approach to AI revenue. We have established a framework across 3 value pools: build the enterprise, create intelligence, and run and scale with confidence. The first category, which is build the enterprise includes consulting, AI foundations and transformation. The second, create intelligence covers enterprise intelligence and agentic orchestration. The third, run and scale with confidence includes AI operations, trust and assurance and frontier innovation. Our principle is simple. AI revenue must be evidenced by client funded work and reconcilable to financial records. The validation process plans sales, delivery and finance, distinguishing direct AI revenue from AI influence pipeline and internal productivity benefits. We expect to introduce AI revenue reporting as part of our H2 FY '27 disclosure and continue it on an ongoing basis, refining the methodology as our portfolio and the markets mature. To conclude, our ambition goes beyond participating in the AI opportunity. It is to establish Tech Mahindra as a differentiated AI-led transformation partner, delivering measurable business outcomes for clients, driving structural improvements in productivity and creating a foundation for sustained profitable growth. Project Helix is the engine of this transformation, bringing together AI tool chains across every service line and AI-led transformation across every industry vertical. This is what AI delivered right means for Tech Mahindra, turning from a technology opportunity into a scalable business advantage to our clients, our people and our shareholders. Thank you. And with this, I hand over to Rohit for a detailed financial performance commentary.

Thanks, Atul. Good evening, everyone, and thank you all for joining. We delivered another strong quarter with broad-based growth across verticals and geographies, 12th consecutive quarter of margin expansion and new deal wins exceeding $1 billion. Reported revenue stood at USD 1,693 million, up 2% Q-o-Q and 6.8% Y-o-Y on a reported basis. On a constant currency basis, revenue grew 2.4% Q-o-Q and 7.2% Y-o-Y. Organic revenue grew 2.3% Q-o-Q and 7% Y-o-Y in constant currency. Revenue in INR terms stood at INR 6,180 crores, up 3% Q-o-Q and up 15.6% on a Y-o-Y basis. Communications business grew 6% Q-o-Q supported by ramp-up of large deals and strategic new engagements, retail, transport and logistics grew 9.6%, driven by scale-up of new deals and growth in existing accounts. Technology, Media and Entertainment grew 0.8% Q-o-Q, followed by Healthcare and Life Sciences at 1.4%. BFSI grew at 0.4% Q-o-Q and 1% Q-o-Q in constant currency. Manufacturing revenue declined 3.9% sequentially against a higher prior quarter base following the accelerated execution of a large European automotive program in the prior quarter, which I had mentioned last time. A sequential revenue headwind associated with the program is expected in Q3 as well though to a much smaller extent. Our total deal wins for the quarter stand at USD 1,023 million. On a last 12-month basis, deal wins stand at USD 470 million, up 34.8% Y-o-Y. The momentum in the deal wins was broad-based across verticals, across geographies, through comms, BFSI, manufacturing and retail logistics and transport verticals for the quarter stood at [ INR ] 250 million with an EBIT margin of 14.8%, up 40 basis points on a Q-o-Q basis and 260 basis points on a Y-o-Y basis. The margin improvement was driven by strong volume growth and project 4 savings, partially offset by the wage hikes. In rupee terms, operating profit stood at INR 2,387 crores, up 40.5% Y-o-Y aided by INR depreciation. An effective tax rate for the quarter came in at 29.9% due to a onetime tax adjustment related to prior period tax matters. Excluding this onetime item, our tax rate was 26.6%. Profit after tax for the quarter was USD 166 million, representing a 23.2% increase Y-o-Y. In INR terms, profit after tax stood at INR 1,586 crores with a PAT margin of 9.8%, an expansion of 130 basis points on a Y-o-Y basis. We generated 135 million of free cash flow during the quarter. Although the cash flow this quarter was impacted by ramp-up of the new [indiscernible] deals, which we -- which will normalize the next quarter. We reiterate our stance to maintain 90% to 100% free cash flow to PAT on a full year basis. [ DSO ] stands at 88 days, up 4 days Q-o-Q, but down 6 days on a Y-o-Y basis. I will now share highlights of our progress in making AI era investments. We continue to strengthen TechM Helix through strategic investments in industry solutions, engineering capabilities and our people. The Zero Gravity telco architecture and consumer Agentic Experience Studio are part of this effort to make AI more relevant to clients' business needs. We establish the [ Toronto ] innovation hub to bring together client co-creation and AI innovation. Additionally, we launched the Engineering Experience Center to help organization move faster from concept to commercialization of their products. This builds on our investment in manufacturing Experience Center, Communication Experience Center and Retail CPG Experience Center, which each center focusing on distinct technology and transformation needs for the industries we serve. We're also investing in AI models built for specific industries and sovereign requirements. Our focus is on solutions that understand clients' business context, give them greater control over their data and make AI more practical and cost-effective to deploy. In this quarter, we launched Indus Terra, a 30 billion perimeter model built with NVIDIA and AWS, a part of India [ AM ] machine. A key part of our AI investments as in deploying our workforce to support a led delivery. We introduced an AI-driven skill-led model, linking career progression to capability, domain proficiency and affluency. Our hedge book as of September end stands at INR 0.4 billion. Under hedge accounting guideline, the mark-to-market movement was USD 13.8 million, of which USD 8.7 million was recorded in the P&L and USD 5 million reflect in reserves. Our hedge book stands at less than 12 months in line with the changed hedging guidelines. Our return to capital employed stood at 31.2% for the quarter, reflecting a sequential improvement of 290 basis points. On a Y-o-Y basis, the ROC improved by 680 basis points. The Board has declared an interim dividend of INR 15 per share reaffirming our commitment to the laid out capital allocation policy of returning 85% and above of free cash flow back to shareholders. To sum up our Q2 performance reflects the execution of our strategy and the continued trust of our clients amid an evolving macroeconomic environment. We will continue to invest in capabilities that address clients' needs and application across engagements while maintaining financial discipline, support sustained profitable growth. We reiterate that we remain on track to achieve our full year FY '27 EBIT margin target of 15%. As we mark our 40th anniversary, and we recognize the strength built over this journey, enduring client relationships, deep industry expertise, and the ability to adapt through successive waves have changed, our task now to build on these strengths and translate them into consistent business performance while building a stronger business for the 3 years ahead. In closing, I would like to thank our shareholders who have been an integral part of this journey. As Rohit shared earlier, the Board has recommended 1:1 bonus share issue, allowing us to mark the anniversary milestone with them for their continued trust and support. Our commitment to our shareholders remains to build long-term value through disciplined execution and sustained financial performance. We can now open it up for questions and answers.

[Operator Instructions]. The first question comes from the line of [ Rakesh Kumar ] with BNP Paribas.

Mohit, my first question was more about your service capabilities. As you shared the numbers by vertical and geography and that is clear to see that you are gaining share. There's a solid execution which is happening across those 2 [ slight ] revenue, but on service offering, we don't get to see a lot that what has transformed [indiscernible] the last couple of years when you have launched multiple new platforms such as TechM [indiscernible]. How that is helping you gain more share? More importantly, where do you see that you have the momentum and strong offering to continue this strong growth, which are those pockets still left for you to continue to capture?

Sure. Thanks, Rakesh. So look, I think as is evidenced by our numbers this quarter, we had pretty strong performance across, as you've seen, first from a vertical perspective, right, the fastest growing for us on a year-on-year basis was retail, which grew at about 9.5% Y-o-Y. But even the slowest that we had was BFSI, which grew at 5.4% CC Y-o-Y, right? So really, the growth was within a band fairly high pretty much across the board. And the reason I'm mentioning verticals, even though you asked about service lines is because the story from a service line perspective also is quite similar. We had a very significant growth, as you can imagine, in our digital enterprise applications. So this is the ServiceNow, Salesforce, SAP Oracle portfolio of our business. And this business grew at almost 13% year-on-year, right? While even businesses which are -- which were relatively sort of slower in this quarter, like, for instance, our BPS business still had a very healthy 6.5% year-on-year growth. So there you have sort of the 2 ends of the spectrum. BPS, as you know, has traditionally been our fastest-growing business for many years. The point I'm trying to make is that across our service lines as well, ADMS, digital core services, which is infrastructure, cloud, security, network services, BPS, engineering services and our package applications business. Probably the one business which has been relatively weaker compared to the others, it has been our experience design and our consulting businesses, but we're very much in growth mode in these businesses. And as you know, for our bond business, we shifted the focus of the business from mid-market more to our largest enterprise clients. So that transition is still very much in place. But like for our vertical businesses, for our service lines as well, growth has been strong across the board. From our perspective, we see digital enterprise applications business is continuing to be a strong driver for our growth now and in the future. And we also see opportunities in engineering, in BPS, in our digital core services business has done well. Traditionally, ADMS, while it has grown very well this quarter, 7.6% year-on-year. That business is actually seeing the productivity expectations on large contract renewals. So maybe that will be a little bit muted. But overall, we remain optimistic about all of our service lines. The trick is to have a differentiated AI tool chain for each and every single service line, and that is what we're very focused on doing. On the vertical side, we are focused on making sure that we have the industry transformation road maps. And I think a combination of both of them, the AI tool chain and the industry road maps will lead to above-industry average growth rate across the verticals and the service lines.

Thanks for quantifying the flavor on that. My second question was maybe around margin. So earlier, we have spoken about that our margin expansion journey would be more driven by gross margin. Now after several quarters of account reduction in this quarter, we have now started seeing an increase in head count which is great to see from a growth perspective, but also it indicates that your utilization possibly at some stage will start peaking. So is it that your gross margin expansion potential is near to the peak that would potentially have led to? Or do you still see there is more expansion potential on the gross margin side?

I'll just start, and then I'll pass it on to Rohit and maybe Atul if they want to add that. So look, I think the thing is that for this quarter, obviously, we had as a result of the significant large deal with [indiscernible], we had an employee transfer as well in certain geographies. And so I would not read too much into in a single quarter. As far as the margin expansion opportunity is concerned and the linkage to growth, look, while our utilization for this quarter has been high, the reality is that we do expect, as a result of the specific AI tool chain we're building for each and every single service line to be able to release head count across our fixed price and gives us an opportunity to continue to grow while releasing head count from fixed-price projects to enable growth. We don't believe for a moment that the gross margin opportunities in the business have been fully tapped out, and we continue to work diligently to make sure that we can continue to expand margins while we obviously prioritize on growth.

I think Mohit covered well. So nothing more to add, Rakesh, I mean all I would say is that, if you remember, when we started this journey, we had a huge gap in the structure that we have with our years of experience, which over time, has become an advantage from an AI context perspective. So from a margin perspective, we've really not tapped into that. As we go forward, that opportunity of rationalizing towards the right equilibrium still exist versus the industry peers, right, while we continue to take advantage of that skill gap that we have. So I think we do see opportunities on gross margin. That will continue not just for the second half but the next 3 years as well as we make our journey ahead.

Our next question comes from the line of Sudheer Guntupalli with Kotak Mahindra AMC.

Congrats on a great set of numbers. My first question, some of the AI coding tools like [indiscernible] have been seeing stagnation in their ARR at least the 3-odd months now. Do you think that the peak of the deflation impact on services business is already behind if we are to take this a project as some proxy for AI deflation. What are you incrementally seeing in your client conversations?

Well, look, I think I don't want to comment on what Anthropic specifically is seeing in the cloud core ARR expansion. I do want to make the point which we've been making throughout, right, is that this whole deflation debate is completely worked in the sense that the opportunity for us is not really to deliver only existing work more efficiently. That has always been the case, right? You always have had to deliver existing work, whether through automation or through rationalization and streamlining more efficiently. Really, the opportunity for us is to take a wider scope of responsibility and to help clients achieve better outcomes while the complexity of their businesses is increasing dramatically. It is true that clients have started looking at open router and other models to be able to incrementally move AI inference workloads to a cheaper open source, open wage models. But this is something that we had called out a couple of quarters ago that the shift that people were expecting the revenue will move from services directly to the model builders. So we'll continue to be able to scale up pricing limitlessly. We had said that, that is not going to happen. This is going to be like the cloud. The model capabilities like the compute and storage capability, which continues to diminish in terms of pricing power and clients will always have the flexibility like there's not a single enterprise client, I know, a Fortune 500 company that uses only a single cloud. And so similarly, clients will use multiple models, and I like the cloud. They have the option of open source model as well. And so they will use their option even if it gives them 98% or 97% of what a frontier model gives.

Secondly, how do you think about growth now? Your 3-year plan in visage outperforming versus larger peers on growth. Now with 7.2% odd year-on-year growth you are already significantly ahead of the large cap deals. So [indiscernible], how do you think of an export milestone? Do you foresee a likelihood of growth potentially touching double digits sometime next year, assuming a tad macro? Or is there some other growth benchmark you are guiding for?

I think -- it's too early for us to start making commitments about the next 3-year plan before we've completely met this 3-year plan. As you can see, we've made -- we've made significant progress. While we hope to be higher than the average. We're actually closer to double or triple the average so far in the first half of the year. We want to absolutely make sure that we nail it for the remainder of the year, deliver the margin, deliver the growth. Clearly, the emphasis of the company has moved towards growth in the past 3 quarters as we had always said as part of our initial road map. As we come closer to announcing the next 3-year road map, we will, like we had the first time don't really identify the expectations in terms of growth. But I can promise you, without giving you a number today that the focus of the company is very much on growth because that also gives us the operating leverage to expand our margins, but we will never be in a situation where we will be either buying revenue or doing deals that create long-term damage for the institution.

Just one last quick question. The second half of the year, do you expect normal seasonality? Or is there any particular change that you noticed this year?

We expect normal seasonality. We continue to see some weaknesses in our European auto manufacturing business, but those are all manageable within the existing portfolio that we have. So we do not expect unreasonable seasonality or unreasonable furloughs in Q3 or Q4.

Our next question comes from the line of Abhishek Pathak with Motilal Oswal Financial Services Limited.

Mohit, congrats again on a great quarter. My question was around margins. I mean, you kind of hit it absolutely out of the path when it comes to the margin guide. Now going forward, does it make sense to leverage AI to, like you said, drive more efficiencies around gross margins? Or is there a possibility of -- I mean, not buying growth, but kind of sacrificing a bit of that extra margin gains to maybe move towards near double-digit growth. So internally, in terms of that trade-off between margins and growth, how is the company thinking and how should we kind of expect the start to end up going forward?

Sure. So I think, look, one of our key focuses, and I sort of alluded to this, but I'll pull the threads together for this question. The first is, we are building a differentiated AI tool chain for every single service line that we have in the company. As we build that differentiated AI tool chain, it will, therefore, enable us to get higher productivity, especially for our fixed price and our managed services contracts, which will then expand gross margin, but also allow us to grow revenue without necessarily. So our high utilization just now it doesn't mean that we cannot grow anymore, right? So expect that to fully play into the remainder of the year and beyond, which is a differentiated tool chain, resulting in lesser greater productivity and lesser head count requirements, therefore, feeding back into our growth as those people are released from existing fixed price projects. Secondly, we have now reached a stage where we are within 20 basis points of the margin aspirations that we had stated. But we had also said that as we get into the third year of the transformation road map, the focus will very much pivot on growth, profitable growth, absolutely, but very much on growth. And I don't anticipate this to change in our next 3-year plan either. The focus of the company will very clearly be on outgrowing [ RPA Group ] and more than our peer group, really setting our own standards in terms of growth for TechM for the future. The future is very much about growth.

Just very quickly, just on the vertical mix a bit. It looks like comps has stabilized quite nicely and DFS seems to be a little bit on and off. Again, kind of from a medium-term perspective, do you see comps now leading growth for us? Or do you see the FSI kind of shipping in? And our interventions if any do we need to make on the BFSI side if you want to kind of far slightly ahead of the market and gain some market share in that vertical?

Thanks for the question. So look, I think, firstly, I just want to point out that while comps has obviously had a very good quarter as we've ramped up on the [indiscernible] large deal. The real standout over the past year or so has been our manufacturing business, right, which has consistently grown very fast. And our retail, travel and transportation business which has grown at 10% plus over the past 4 quarters or more, right? So we continue to see a broad-based growth. As far as the BFSI piece is concerned, we have grown at about 5.4% CC in the current quarter. But the past 2 quarters prior to this, right, we grew at upwards of 8%. And we fully expect to get back to that or higher levels of growth in the next quarter. From a BFSI perspective, look, we had set high aspirations for ourselves and I think as President [ Kennedy ] had said, we do these things not because they're easy, but because they're hard. Obviously winning market share in BFSI, growing, shifting the revenue distribution of or a large-sized company like ours is a hard thing to do. We feel that we have all the ingredients now in place. We have made a few small changes to the team. We have brought in additional leadership, and we remain very confident about medium to long-term opportunities in BFSI. It has been slower burn candidly than I had expected when I started, but I can assure you that clearly has a huge amount of focus within the organization, not because the other verticals are less important is because of the size of the price in BFSI is very significant. But even at this is actually on a year-on-year basis among our slower growing verticals, but we are still growing in line or slightly ahead of our larger peers.