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Tech Mahindra ends lower after tough misses. Five takeaways from Q1

Incoming MD and CEO designate Mohit Joshi, who will take over in December, said he remains optimistic about the company's prospects

Harichandan Arakali
Published: Jul 27, 2023 06:00:00 PM IST
Updated: Jul 27, 2023 06:20:23 PM IST

Tech Mahindra ends lower after tough misses. Five takeaways from Q1 Tech Mahindra CEO and MD CP Gurnani (right), who hands over to Mohit Joshi this year, said the latest Q1 was one of the toughest quarters for the company Image: CP Gurnani - Amit Verma

Tech Mahindra shares ended nearly 4 percent lower on Thursday in Mumbai, after the IT services company posted fiscal first quarter numbers on July 26 that all missed analysts’ estimates. Shares were down as much as 5.4 percent earlier in the day on the Bombay Stock Exchange.

Long-timer MD and CEO CP Gurnani, who is handing over the reins to Mohit Joshi, a former Infosys senior executive, told analysts in a conference on July 26 that the three months ended June 30 constituted “one of the toughest quarters in recent times”.

Tech Mahindra, which has its origins as a joint venture between the Mahindra group and British Telecom, remains dependent on wireless providers and other customers in its communications, media and entertainment segment for more than a third of its revenues. These customers are among those who have cut back sharply on tech services spending in the ongoing global economic slowdown.

Here are five takeaways from Tech Mahindra’s earnings results and comments from Gurnani, who retires in December, and Joshi:

1. Toughest quarter

Q1 FY24 revenue, at $1,601 million, fell 4.2 percent from the previous quarter in constant currency terms, and 1.9 percent from the same quarter a year earlier. Ebitda at $163 million is down 33.7 percent sequentially and 31.8 percent year-on-year (y-o-y); margin at 10.2 percent, lost a whopping 460 basis points (100 basis points is 1 percentage point) and profit after tax, at $84 million, is down 38 percent quarter-on-quarter (q-o-q) and down 41.1 percent y-o-y.

Gurnani said incoming CEO Joshi is going through “baptism by fire”, adding, “tough times don't last. Unprecedented times don't last”.

2. Heroes and culprits

Tech Mahindra’s manufacturing practice grew 8.6 percent from the year ago, as did its technology segment, increasing 8 percent. However, communications, media and entertainment, which accounted for almost 38 percent of revenues, fell 9.4 percent on the quarter; that was exacerbated by a 3.2 percent decrease in the banking, financial services and insurance (BFSI) segment and a 30-basis point dip in the retail and transport and logistics line.

Sales actually rose a modest 1.4 percent in the Americas region from a year earlier but was down 50 basis points sequentially. Sales was also down 6.7 percent q-o-q in Europe.

In addition to the macroeconomic slowdown and reduced spending by clients, one important customer also declared bankruptcy, Gurnani said.

Also read: How TCS, Infosys see opportunity in multiple planet-scale transitions

3. Focus on talent remains

“We trained 8,000 people last quarter to upskill in new AI platforms and in generative AI,” Gurnani said. “Effectively that means we have utilised some of these challenges to repurpose and retrain our people.”

Headcount, at about 148,300, is lower by 6.2 percent from a year ago. Attrition is down too, at 13 percent from 22 percent a year ago.

The company has invested in a strong “generative AI studio” developing solutions and use cases, he said. And its strength in the telecom sector will come through in the quarters to come, he says, with solutions in 5G, for example.

4. Deal wins

Tech Mahindra reported $359 million in net new deal wins, which is less than half of what it garnered a year ago in the same quarter, and lower than the half-a-billion plus it did in the previous quarter as well. The company also reported increases in the number of customers contributing annual revenue of $5 million, $10 million and $50 million, and a fall in the number of clients accounting for $20 million each annually.

5. CEO Designate

Joshi, who has spent 22 years at Infosys, including at its BFSI practice, joined Tech Mahindra about five weeks ago. He’s spent time meeting employees and some customers, he said, and many clients have decades-old relationships with Tech Mahindra and those engagements remain solid. “They really see us as an integral part of their tech-driven transformation journeys,” he added.

The company’s services lines have seen a lot of investment; they are cutting-edge and across the board are being infused with AI, he noted. “In the medium to long run, again, given what I've seen of the company, our clients, the ecosystem, I remain very optimistic about the opportunities in front of us,” he said.