Tech Mahindra posts modest revenue growth, but margins hit new high

Tech Mahindra Ltd kicked off the second half of the fiscal year with modest sequential growth and outlined a cautious future, even as it neared the half-way mark of its three-year revival plan during which its operating margins doubled.

The Pune-based IT services company reported $1.59 billion in revenue for the July-September period, up 1.4% sequentially but down 0.2% on a yearly basis. Most of the growth came from manufacturers, which made up three-fifths of the company’s incremental revenue of $22 million. Its net profit rose 1.5% to $135 million.

The company’s management said the macroeconomic environment was stabilizing, but concerns existed.

“From a macro perspective, we see the macro as stabilizing and maybe improving in parts. But it is still fragile. There is unlikely to be any sort of V-shaped recovery in spend, but we do see a stabilization and, hopefully, growth in the second half of the year,” said Mohit Joshi, chief executive of Tech Mahindra, during the company’s post-earnings press conference on Tuesday.

Tech Mahindra shares closed 1.2% higher at ₹1,468.15 apiece on the BSE on Tuesday.

The company’s mixed signals were in contrast to two of its peers.

A day before, India's third-largest software services firm HCL Technologies Ltd’s management said that the macro environment was more or less unchanged. This was in contrast to larger peer Tata Consultancy Services Ltd, which said that there is “lingering uncertainty” in the broader economic environment.

TCS and HCL respectively ended the second quarter with $7.47 billion and $3.64 billion in revenue, up 0.6% and 2.8% sequentially.

AI focus

Both the larger companies also made big-bang AI announcements. While Mumbai-based TCS announced plans to invest upwards of $6 billion over a six-year period in building and running a 1 GW data centre, Noida-based HCLTech became the first company among Indian IT’s Big Five to announce revenue from the new technology. It got $100 million in AI-led revenue last quarter.

Tech Mahindra, on the other hand, has been placing its bets on large language models.

“We are partnering to develop an indigenous, sovereign, large language model with 1 trillion parameters, the significant technical milestone that places it among the largest AI models under development globally,” said Joshi.

However, he did not reveal the investment details, and queries on project timelines went unanswered.

Instead, the management said the company was investing in talent rather than in data centres.

“The investment, from our perspective, is largely, sort of in terms of talent, rather than, you know, rather than a significant amount of data center investments, right? So, it is largely in terms of partnership and talent, that's where our investment is coming in as of now,” said Joshi, in response to Mint’s question during the press conference

The company ended the September quarter with 12.1% in operating margins, up 100 basis points from the previous quarter. Its management attributed this to “improved productivity, initiatives around fixed price projects, some volume growth, savings from selling, general and administrative expenses, amongst others. One basis point is one-hundredth of a percentage point.

This jump in profitability comes as a shot in the arm for its management, which seeks to increase its operating margin to 15% by March 2027, and grow its revenue faster than peers as part of a three-year roadmap called Project Fortius, which was announced last year.

While the revenue growth has not crossed 3% in the last year, the margins have doubled from 6.1% in April last year, when it announced its margin expansion plan.

At least one analyst expressed confidence in the company’s plans.

“New deal TCV (total contract value) at $816 million was also at its highest-ever level since Q4FY22. Healthy growth coupled with continued margin expansion reinforces confidence in the company to deliver on its three-year turnaround plan outlined at the end of FY24,” said Manik Taneja, executive director for IT services at Axis Capital.

Tech Mahindra, which does not give quarterly or yearly outlook, said that tech spends for IT projects would follow.

“As far as the Indian IT industry is concerned, I do feel that the industry has a very sustainable business model, has shown resilience across economic cycles. But equally, it has had portions of hyper growth, like we saw during Covid, and periods of very slow growth, like in this period. But even in this timeframe, I feel the industry, especially Tech Mahindra, has shown its resilience,” said Joshi.

He added that “as the overall economic activity across the globe picks up, we do feel that tech spend will follow.”

For now, its results exceeded analyst expectations. According to a Bloomberg poll of 30 analysts, Tech Mahindra was expected to report $1.55 billion in revenue in the second quarter.

Another bright point was its profitability, which has been increasing for eight consecutive quarters.

The company added 4,197 people last quarter to end with 152,714 employees. HCL added more than 3,000 employees, while TCS cut its employee count by more than 19,000 people.