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TechM reported an improved revenue performance in Q3, with 1.1% QoQ in cc, aided by 140bps in a one-off product revenue and Comviva/Retail seasonality. Reported EBITM expanded by 70bps QoQ to 5.4% (adj. EBITM: 7%), as TechM continued with its portfolio rationalization. Management highlighted that while the overall demand environment is slightly more positive compared with the last six months, it is too early for any green shoots. The new CEO is currently in the process of defining his long-term strategy. Company is now focused on 3 tracks—revenue, margin improvement, and organization building. As part of the overall turnaround plan, Management will undertake higher than usual investments to improve the company’s positioning. After the recent rally in the stock price (up 10%/22% in the last 1M/3M), we see limited near-term upside and opt to wait for the new CEO’s detailed strategy before taking a more constructive view. We revise FY24-26E EPS by -12% to 2%, factoring-in the Q3 performance, slower progress on margin recovery, and the lower ETR. We maintain ADD, with TP of Rs1,450/sh at 19x Dec-25E EPS.

Results Summary

Revenue grew 1.1% QoQ (1.1% QoQ/-5.4% YoY in cc terms) to USD1.57bn, above our estimate of Rs1.54bn. The Enterprise segment grew 2% QoQ, while CME declined 0.3%. In the Enterprise segment, growth was led by Manufacturing (2.9% QoQ), and Retail, Transportation & Logistics (6.4%), and Others (8.4%), while Technology and BFSI declined 2.9% and 2% QoQ, respectively. Americas revenue fell (1.5% QoQ), while Europe (2%) and ROW (6.3%) registered growth. Reported EBITM expanded by 70bps QoQ to 5.4%, in line with our estimates. Adjusted EBIT margin was 7%, down by 30bps QoQ. Net new-deal wins fell to USD381mn compared with the USD640mn in Q2. Utilization improved to 88%, from 86% QoQ. Total headcount declined 2.9% QoQ to 146,250. What we liked: Overall revenue performance, healthy cash conversion (OCF/EBITDA of 181%). What we did not like: Weak deal wins, softness in North America (declined 1.5% QoQ), and slow progress on adjusted EBITM recovery.

Earnings Call KTAs

i) Company is embarking on a 3-pronged strategy to unlock value from operations. The first track is focused on sales improvement by simplifying the organizational structure to 6 SBUs from 12 earlier. This will bring more attention on and investment into top accounts, while revamping efforts towards engaging with smaller accounts. The second track pivots around margin improvement by creating a centralized delivery structure that will result in innovation and domain expertise. The third track centers around building the organization by changing some of the internal policies. ii) Revenue growth in Q3 was led by Manufacturing, wherein the company continues to leverage its strength in Automotive and related ER&D services. iii) Telecom, BFSI, and Hi-tech were impacted by furloughs. iv) Company launched the Vision Amplifier, a solution that infuses GenAI in computer vision and provides end-to-end workbench to substantiate computer vision use cases. v) Active client conversations related to GenAI are currently ongoing, and Company is witnessing early stage experiments, with POCS starting to move into production pilots. vi) Pyramid rationalization, subcon optimization, offshore/onsite mix, better utilization, and value-based pricing remain the margin levers in the near-tomedium term. vii) Company has built a range of capabilities in the BFSI segment through acquisitions. Acquisition of CTC provided digital engineering capabilities, of Citisoft granted high-end, buy-side and custodian consulting capability, and of Target gave transaction processing capability, along with capabilities grown organically. viii) It added over 2,000 freshers in 9MFY24 and trained 10k associates on Gen AI.

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