TECHM - Tech Mahindra Limited Share Price

Tech Mahindra's management provided a cautiously optimistic outlook during the Q4 FY25 earnings meet, highlighting a revenue of $6,264 million for the year, reflecting a 0.3% growth on a constant currency basis. This growth comes after a strategic decision to scale down non-core and loss-making operations aimed at stabilizing key accounts. The operating profit for FY25 stood at $607 million, marking a significant 60% year-on-year increase, with an operating margin expansion of 360 basis points to 9.7%.

Forward-looking points include a strong pipeline of deal wins totaling $2.7 billion for the year, representing a robust 42.5% growth year-over-year. Key sectors like BFSI grew by 5.2%, driven by the acquisition of new logos and deeper engagement with existing accounts. The management also emphasized the launch of the TechM Consulting service line and a renewed focus on AI offerings under the strategy "AI Delivered Right."

For FY26, management expressed a commitment to disciplined execution amidst challenging macroeconomic conditions, while holding on to the goal of achieving greater than industry average growth by FY27, with an EBIT margin target of 15%. They underscored that around 50% of the new deals had come from Fortune 500 clients, showcasing a shift in growth strategy towards high-value engagements.

Management expects about $600-800 million in deal wins for FY26, remaining mindful of potential challenges in sectors like auto and manufacturing. Encouragingly, they reported a 104% dividend payout ratio, signaling commitment to shareholder returns while simultaneously focusing on laying strong foundations for future growth initiatives.

Q&A Section of Tech Mahindra's Q4 FY25 Earnings Call

Question 1: "Can you talk about the margin tailwind from the 1 percent top line reduction from scaling down non-core businesses?"

Answer: Yes, the margin benefit from our 1 percent reduction in top line is significant. While I can't quantify it exactly, it contributes approximately 20 to 30 basis points within our overall margin improvement. This reduction aligned with our strategic focus on scaling down non-core segments, which mitigates risk and enhances profitability.

Question 2: "What is the Forex margin tailwind in Q4?"

Answer: The Forex margin tailwind for Q4 was around 30 to 40 basis points. This minor contribution stems from favorable foreign exchange rates, benefitting our overall margin for the quarter.

Question 3: "How many Global Fortune 500 customers did we have in FY24?"

Answer: In FY24, we added about 45 must-have accounts, with roughly 10 percent or a quarter of those being Fortune 500 clients. So, you can infer that we had around 40-45 Fortune 500 clients before this addition.

Question 4: "How are the margins in our BPS business composed of voice and non-voice services?"

Answer: Our BPS business has evolved significantly; we have transitioned from about 70 percent voice services to just over a third being voice-related. This transformation emphasizes our shift towards technology-enabled services rather than a pure FTE model, integrating agentic AI solutions to enhance efficiency.

Question 5: "Is there more pruning of loss-making businesses to be done?"

Answer: Most of the significant pruning of loss-making businesses was conducted last year, focusing on portfolios misaligned with our core strategy. We'll continue to refine performance in remaining segments, but key corrective actions are already underway to ensure recovery and profitability.

Question 6: "Can you discuss the impact Gen AI might have on our BPS business?"

Answer: Gen AI will significantly transform our BPS business. We are shifting towards a hybrid model that combines AI with human agents to optimize service delivery. This allows us to provide more innovative, technology-enabled solutions while retaining human oversight where necessary. We're positioned well to exploit this trend as we redefine the BPO landscape.

Question 7: "Given the softness in certain sectors, how do you see industry growth heading, and how will it affect your margin levers?"

Answer: Industry growth is moderating, with estimates dropping to low single digits from earlier projections. This implies challenges for margin growth. However, we focus on disciplined execution and managing costs while seeking deal wins to maintain our margin targets despite macro pressures.

Question 8: "How might your deal closure momentum have shifted recently?"

Answer: We've not experienced cancellations, but we observed slower spending in certain sectors like autos and hi-tech. However, we did see some recovery signals towards March, indicating a potential uptick in deal activity as companies begin to reinforce their partnerships.

These responses provide insights into Tech Mahindra's strategy and outlook as they navigate current economic challenges.