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TechM’s revenue slumped 4% QoQ (4.2% CC) to USD1.6bn, missing our estimates. EBITM declined by 440bps QoQ to 6.8%, well below our estimate even after adjusting for one-offs. The sharp decline in CME (-9.4% QoQ), owing to cut in discretionary spending and closure of network services projects, largely explains the revenue miss. Deal wins remain weak, and stand at USD359mn (TTM deal-intake down ~25% YoY). Mgmt attributed the weak performance to cut in discretionary spend/delay in decision making amid macro uncertainties. It expects performance to recover in H2. We cut FY24E EPS by ~17%, factoring-in a weak Q1 and near-term uncertainty, while lowering FY25- 26E EPS by <2%, in anticipation of demand improvement/better execution. TechM has failed to capitalize on its strength in the areas of communications, ER&D, BPO, XDS, etc, and deliver consistent performance in the past. We believe leadership change gives more credence to turnaround efforts, entailing better execution, sustainable margin expansion and scaling of BFSI & other verticals (ex-CME). We retain BUY; TP: Rs1,200, at 16x Jun-25E EPS.

Results Summary

Q1FY24 revenue declined 4% QoQ (4.2% in cc terms) to USD1.6bn, lower than our estimate. The revenue decline was led by sharp fall of 9.4% QoQ in CME. Within enterprises, BFSI declined 3.2% QoQ, while Retail, Transportation & Logistics and ‘others’ also saw a marginal decline. Manufacturing and Technology reported an uptick of 1.8% and 0.1% QoQ, respectively. Revenue from Europe, ROW and Americas fell 6.7%, 8.2% and 0.5% QoQ, respectively. EBITM declined by 440bps QoQ to 6.8%, on account of onetime provision pertaining to client-specific bankruptcy (-200bps), weak revenue performance (-200bps), and Comviva seasonality (around -40bps). IT Services segment margin contracted by 510bps QoQ to 9.1%, while BPO segment margin reduced by 170bps QoQ to 16.3%. Net new-deal wins for Q1FY24 clocked at USD359mn, down by 39% QoQ. Headcount declined for the third straight quarter, down 4,103 QoQ in Q1FY24 (~10% decline in the last 3 quarters). Utilization further improved to 87.2%, from 86.5% in Q4FY23. What we liked: Added reduction in attrition (12.8% in Q1 vs 14.8% QoQ), healthy cash conversion (~79% OCF/EBITDA in Q1). What we did not like: Weak operating performance with miss on revenue and EBITM, lesser new-deal wins.

Earnings Call KTAs

i) Q1FY24 operating performance was impacted by some transformational projects coming to an end, one client filing for bankruptcy, and Company failing to balance revenue and costs within a shorter time-frame. ii) Management believes that most headwinds for the CME business are behind, and expects gradual recovery, as telcos are cautiously spending on capex and opex. Budgetary pressures on discretionary spending impacted performance of the verticals. iii) Offshoring, pyramid rationalization, subcon optimization, recovery in revenue growth, and divestment of the non-core portfolio remain the medium-to-long-term margin levers. Subcon as a % of revenue stands at ~14% in Q1 which Management aims to bring down to ~10%. Management sees further headroom of 4-5% improvement in offshore. iv) Management highlighted structural drivers for margins: increase in share of revenue from developed markets like the US/Europe; increase in revenue contribution from BFSI, Manufacturing, and Health Services; reselling some offerings as platforms; looking at potential JVs with some customers, to develop new-service offerings or new niches. v) Salary hike for most employees were implemented in Q1 (-130bps impact), with some (for senior employees) to be implemented in Q2. vi) There was a USD6-7mn revenue hit sequentially from client bankruptcy in Q1. vii) Management expects deal closures to be impacted in H1 due to weak macro conditions, and hopes for a recovery from H2. viii) Weakness in CME was largely attributable to reprioritization in the IT digital domain and network services.

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