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Focus on margins and leadership transition

We attended TechM’s Investor Day 2023; the key focus of the meet was upcoming leadership transition and operational profitability. Management commentary was encouraging, with stable spending environment and deal flow in both communication and enterprise businesses. TechM continues to focus on improving its profitability and expects FY24 margins to improve, led by lower subcon expenses, improving offshore, and divestment of non-accretive businesses. With the upcoming change in leadership, due to the retirement of Mr. Gurnani (CEO), long-term strategic direction will continue to remain in focus.

Key strategic areas to drive growth

* Incrementally, the company has been focusing more on partnering with strategic accounts; its revenue from partners and alliance contributes about 30% to its overall topline, while its threshold stands at 40%. The incremental 10% delta would come from strong traction on Cloud, Hyperscalers, and Cybersecurity.

* Currently, the Product and Platform (P&P) generates $450m annualized revenue, contributing ~8% to its overall topline. The company aspires to register a 30% CAGR over the next three years to $1b revenue by 2026.

* The Business Process Services (BPS) arm of Tech Mahindra is complementing the overall core business; the company’s Enterprise Business Solutions Unit has won a $700-m deal YTD. The company has mined 50% of the top 200 accounts to gain a higher wallet share, leaving a huge scope for expansion.

* On the engineering business, the company has streamlined the unit by expending its global delivery channel and banking on fortune 500 accounts (majorly Auto OEMs and Tier-1 suppliers).

* The company is co-creating solutions with multiple Auto OEM partners (Sumitomo is one of them) and is currently generating $20mn from this initiative. There still lies significant scope for scaling up its revenue pie with an additional 15 OEMs

Flexing on multiple margin levers

* TechM continues to focus on improving quality revenue, and divesting nonaccretive and low-margin businesses, sometimes at the costs of growth.

* The company would focus on integrating the already acquired capabilities and drawing synergies out of them, rather than venturing into new investment in the inorganic piece. The management indicated that it would remain selective or follow a disciplined approach in acquiring new capabilities or specific competency.

* It firmly believes that it can lower the subcon percentage of revenues to below pre-covid levels (over the next four to five quarters) by rationalizing pyramid and up-skilling more freshers to become billable. ? Similarly, the traction for offshoring remains positive and it is expected to outpace the pre-covid trend. The recently signed large deals have major offshoring components, which should drive up margins

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