Lower subcontractor costs boost Tech Mahindra net profit by 29%

Bengaluru: Tech Mahindra Ltd, India’s fifth largest information technology (IT) services company, started the financial year ending March 2025 on a positive note with net profit jumping 29% sequentially on the back of lower subcontracting costs.

The company reported a net profit of $102 million, which came from a 14% sequentially drop in subcontracting costs to $181 million.

Even as the company’s net profit shot up, analysts expected more. A Bloomberg poll of 28 analysts estimated the company to report $104.6 million in net profit.

All IT services companies hire external consultants to handle software-related work. Spending less on such consultants is a big lever to improve profitability for IT companies, given that salaries account for 60–65% of their expenses, with subcontracting costs making up 6–13% of total expenses.

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Pune-based Tech Mahindra, part of the $17 billion Mahindra and Mahindra (M&M) conglomerate, reported a 0.7% sequential rise in its revenue to $1.56 billion for the quarter ended June 2024 on the back of growth in its healthcare business. 

Clients in healthcare and life sciences accounted for $120 million of the company’s revenue. A sequential revenue boost of $9 million from clients in this vertical accounted for 82% of the company’s overall incremental revenue of $11 million in the April-June period.

Still, Tech Mahindra’s chief executive officer Mohit Joshi maintained caution. 

“I don't think that the situation is that dramatically changed from three months ago. I would say that we are seeing a slightly more stable demand environment, but that's probably it. I wouldn't say that there has been a massive change or a massive upswing from a demand perspective,” said Joshi in the post-earnings press conference.

Tech Mahindra’s performance beat street expectations.  A Bloomberg poll of 29 analysts revealed the company was expected to report $1.55 billion in revenue. Tech Mahindra does not give quarterly and yearly future guidance.

The firm reported an operating margin of 8.5% for the quarter, up 110 basis points. This is the first time in four years that it has started the financial year with a bump in operating margins. The management attributed this jump in profitability to its three-year road map outlined in April 2024. 

Also read | Tech Mahindra targets 2.5x margin growth by FY27 amid drastic profit decline

“This is a result of Project Fortius, our cost management programme. Externally and internally, we are also focused on looking at our revenue mix, looking at the geographies where we work,” said Joshi, reflecting optimism on margins increasing in the long term. 

The company’s performance comes as a shot in the arm for its management, which, through its three-year road map named Project Fortius, seeks to increase its operating margin to 15% by March 2027, and grow its revenue faster than its peers. Tech Mahindra aims to do so organically without any acquisitions, by investing in its key accounts and spurring growth in its non-telecom businesses.

Joshi, who took over the reins from predecessor C.P. Gurnani In December last year, had communicated to analysts in April this year that FY25 would be better than the last financial year, using the word “turnaround” six times in reference to the current financial year.

At least one analyst was confident of the company undergoing a transformation. 

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“We see TechM's Q1FY25 as a steady quarter and continuing to provide initial confidence on the multiyear transformation ahead, which we back and remain positive about,” said Manik Taneja, executive director for IT services at Axis Capital.

In terms of geography, the company gets more than half its revenue from North America. It got $817 million of its revenue from the region, $31 million more than the preceding three months. The company’s largest client pool ensured that business lost from Europe and the rest of the world did not hurt revenue much.

Although the company’s growth was propelled by its healthcare and life sciences businesses, the communications vertical has been the IT services company’s unique moat, fetching it more than a third of its revenue. Tech Mahindra got 33%, or $516 million of its April-June revenue from this vertical. 

However, revenue from this vertical has declined more than $150 million since the quarter ended March 2023.

Much like its peers, the company did not spell out any revenue pipeline from generative artificial intelligence (GenAI). It did not reveal the number of GenAI projects it is working on but added that 25,000 of its 147,000 workforce had been equipped with AI-related skills.

LTIMindtree, the country’s sixth largest IT services company grew 2.5% to $1.1 billion and its net profit rose 3% to $136 million. Chief executive Debashis Chatterjee was optimistic of the future as he eyed “green shoots of recovery” even as he did not give a forward-looking guidance.

Tech Mahindra added 2,165 employees last quarter, taking its total head count to 147,620. Among the big five, Tata Consultancy Services Ltd and Wipro Ltd added headconts by 5,452 and 337 respectively, while Infosys Ltd and HCL Technologies Ltd reported a decline of 1,908 and 8,080 employees respectively.