TECHM - Tech Mahindra Limited Share Price

Management provided an optimistic outlook for Tech Mahindra, highlighting key performance metrics and strategic initiatives aimed at achieving their FY "˜27 goals. They reported a Q2 revenue of US$1,586 million, marking a 1.6% sequential growth in constant currency, while achieving a 12.1% EBIT margin, a significant increase consistent with their ongoing efforts for operational efficiency.

Key forward-looking points include:

1. Growth Strategy: Management expressed confidence in the next six quarters, stating that the foundation laid in the first half of their transformation plan will lead to improved performance in the second half of FY '26. They anticipate steady pipeline growth and emphasized the importance of expanding existing client relationships.

2. AI and Technology Initiatives: Tech Mahindra is positioning itself as a leader in AI solutions, having been recognized by the Government of India in the India AI mission. They are developing a sovereign large language model and launched the TechM Orion AI platform to enhance organizational efficiency.

3. Client Growth: The leadership noted a substantial increase in client engagement, with 57 new must-have accounts added in FY 2025, contributing to significant revenue growth. The quarter saw 21 new accounts generating over $1 million each in revenue.

4. Deal Pipeline: Management closed total new deal revenue of US$816 million, reflecting a 57% year-over-year increase. They identified that broader investment in key partnerships would continue to drive growth across various sectors like manufacturing, BFSI, and logistics.

5. Margin Expansion: EBIT margins are projected to continue improving, with sustained focus on operational efficiency through initiatives like Project Fortius, which aims for significant cost optimization and productivity increases.

In summary, management remains focused on enhancing operational performance, expanding strategic partnerships, and positioning the company for future growth while navigating macroeconomic challenges.

Question 1: If we hit our margin goal of 15% earlier than what we had stated, will you let that flow through the P&L or would you use that flexibility to make more investments?

Answer: While we had initially planned investments, the current macro environment is slower than expected. I remain cautious about dramatically increasing investments unless we see strong growth next year. We'll balance between necessary business investments and ensuring margins returned to investors.

Question 2: How do you view the impact of AI on your service lines"”deflationary, expansionary, or initially deflationary and then expansionary?

Answer: In the long run, AI's impact is expected to be productivity-driven; however, clients' expectations are becoming more realistic. We believe simplification and modernization are key. Our TechM Orion platform and AI agents can solve complex business issues, positioning us for positive differentiation in the market.

Question 3: Could you comment on the gross margin improvement; was it mainly currency-led?

Answer: The gross margin improvement indeed reflects various factors, not just currency benefits. Operational efficiency from Project Fortius has enhanced our overall margins, particularly concerning SG&A and fixed-price projects, demonstrating our focus on efficiency across multiple areas.

Question 4: Could you provide insights on your US workforce percentage on H-1B visas and prospective margin implications?

Answer: Less than 1% of our workforce is on H-1B visas, with overall visa dependence under 30%. We're implementing a strategy to protect core talent in the US and strengthen local capabilities, ensuring we remain resilient against any regulatory changes coming our way.

Question 5: How are you addressing the challenges affecting client accounts in the $6 to $20 million bracket?

Answer: Our focus remains on larger clients, where growth has been steady. While portfolio-specific challenges may arise, such as clients significantly scaling down operations, the overall health of our relationships remains robust, recognizing the potential to grow revenue among our top-tier clients.

Question 6: Are you changing your growth goals due to less optimistic industry growth projections?

Answer: Our expectations for FY '27 remain higher than FY '26, although growth may be more muted than initially forecasted. We confidently anticipate improvements in industry conditions while holding onto our strategic objectives, aiming to outpace the overall market.

Question 7: Should we expect more reductions in SG&A moving forward?

Answer: Moving forward, we anticipate that SG&A will continue contributing positively but at a steadier pace than previously seen. Profitability will increasingly be driven by improvements in gross margins, particularly through fixed-price projects and portfolio integration.

Question 8: How do you see your new business total contract value moving and what are your targets?

Answer: Ideally, we'd like to reach closer to the billion-dollar mark for new business TCV. We're currently around $800 million and are focused on converting our strong pipeline to achieve this target, indicating encouraging growth and future performance potential.

Question 9: Will vendor consolidation opportunities in Europe yield results soon?

Answer: We expect incremental progress in vendor consolidation opportunities in Europe over the next quarters. While decisions are being made, we are optimistic that strategic additions, like our recent leadership appointments, will support these goals.

Question 10: What do you see for margin improvements over the next six quarters?

Answer: While achieving higher margins does get more challenging as we approach targets, we have laid out a comprehensive plan. Our team continually reassesses strategies based on market conditions, and we're committed to delivering consistent margin improvements moving forward.