Deal Pipeline Strong In Every Geography: Tech Mahindra

Tech Mahindra is betting big on communication and manufacturing vertical to drive its growth going ahead. Its chief executive officer C P Gurnani, chief operating officer L Ravichandran and chief financial officer Manoj Bhat, spoke about the company’s fourth-quarter results, the growth outlook for next quarters and order book for this fiscal in an interview with Swati Khandelwal.

Tech Mahindra hasn’t posted good numbers in Q4 of fiscal 2019. Can you highlight the factors that disappointed the numbers, and do you think the coming quarter is going to be a better one?

Gurnani: Tech Mahindra’s annual growth has been around 12.5% and its annual profitability increased by around 35%. So, if seen on an annual basis then our communication business has grown by around 10%. However, when seen on a quarterly basis then the market was expecting that everything will be very good, but we are very happy as the communication business grew by 4.5% sequentially. Similarly, enterprise business has shown a negative growth of 2.2%. But, in the overall scheme of things, if we are looking at the entire business then we assume that every geography, location and vertical can’t perform in the same way in every quarter. So, balancing things suggest that results have been good. But, we would have managed better expectations for the street. We posted an Ebitda of 19.2% in the last quarter and this time it stood at around 18.4%.

Earlier, foreign currency hedging vs tailwinds used to be beneficial for us but this time it led to small losses in foreign currency. Secondly, the fine tuning of the projects at the time of closure had an impact and I consider it as a cyclical impact. However, the company will keep focusing on execution and operational efficiency and we are very happy with it.

So, the expected Ebitda range is not going to be above 18.5 to19%? 

Gurnani: It may go up if you challenge Ravi to do so. He will try to make it happen.

Tell us about the retail pattern and provide an outlook on growth in the next quarter?

Manoj Bhat: Retail is relatively a small vertical for us, but our offerings are very strong in the segment. Retail business declined in the fourth quarter, but it was a seasonal decline because Q3 was very strong. So, if seen from the retail perspective then our retail offerings include analytics and IOT and are high on demand, but as I said, it is a small vertical for us. Communication and manufacturing are big verticals for us. In fact, manufacturing business has crossed the billion-dollar mark. Our strong capabilities like engineering services, ERP, EBS, IOT and analytics, which is backed by the strong client base has helped it to be a billion-dollar vertical. And, I feel that these two verticals will do well in the new fiscal. But, we will also try to meet the growth aspirations in other verticals in the enterprise business. And, we will try to keep up the uptick in the communication business.

Name the geographies and areas that will deliver strong growth to you?

Ravichandran: We are growing well in all the geographies like in the US, Europe, the UK, and Germany. We are doing very strong in Netherlands and northern countries. And, the Asia Pacific region like Australia, New Zealand, Korea, China, Japan has been very strong . We are also doing well in Africa and the Middle East as well as in India. We don’t want to depend on any particular geography just to de-risk the business. In fact, our deal pipeline is very strong in almost every geography.

What is your order book for FY20?

Gurnani: Our deal pipeline is very strong. As you have already said that there are concerns in some areas mainly if the US-China negotiations are not settled in a short span and prolonged then it may lead to a slowdown across the world. It will also have an impact on us as the two biggest economies of the world will enter a standoff mode. Apart from this, digital transformation and optimisation are need of the hour and everyone is looking out for it. Have a look on RFID, the defence project of Indian Navy on which we are working right now, then you will find that that there will be growth in projects related to cybersecurity and RFID, and we are very strong in blockchain, networking and cybersecurity.

Do you have more orders of the same nature in your kitty?

Gurnani: I think that cybersecurity will grow at a fast pace and we provide new and unmatched/rare solutions for blockchain. I am terming it as a rare one because in the normal case, land records are seen in case of banking, but today we are providing India telecom solution where you can secure and protect your number while porting it. So, we are offering several solutions.

You went for a buyback and then announced a dividend of Rs14. Let us know about the cash deployment plan of the company and how it will be utilised? Also, update us on merger and acquisition (M&A) interests of the company?

Manoj: First I would like to talk about M&A which is a core part of our strategy. And, it has always been a core and you would have seen that we did several M&A deals in last 4-5 years in different verticals like healthcare and BFSI, engineering services, BPS, platforms and digital. We keep on looking at these areas, but geography and client always remain in our focus. Broadly, the process has been followed and has been very disciplined on it.

In the case of capital allocation, we have a philosophy that we will never keep the excess capital and cash at our place. Under the same process, we went for a buyback as we had ample cash and are continuing with the dividend of Rs14 that we did last year too. The same philosophy will guide us in future too. It also comes at a time when our cash flow matrix has improved dramatically from where it was a year back.

Let’s talk on attrition. How is the market and let us know about your approach? Also, update us on campus hiring and all?

Ravichandran: I have good news in case of attrition because it has gone down by 2.5% in this quarter but we will try to reduce it further. And, we are doing so through multiple angles i.e. how to create digital ready employees, and also for the new age delivery that is approaching us like artificial intelligence, blockchain, IOT, as we have invested a lot for training in these domains. Interestingly, we have allowed our employees to restrict themselves to their homes and learn these things and we are offering training and certificates for the same. In short, we are upgrading the skills of our employees. And when it comes to campus hiring than we don’t provide any forecast on it. However, 8,000 to 9,000 people were hired last year, and I feel that numbers will go up this time.―DNA India