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

  • Tech Mahindra, India's fifth largest IT services company, reported the worst margin and profit decline among its peers.

Shouvik Das, Jas Bardia
First Published25 Apr 2024, 09:42 PM IST
Tech Mahindra will not be considering acquisitions, and instead, focus on organic growth.
Tech Mahindra will not be considering acquisitions, and instead, focus on organic growth.(REUTERS)

New Delhi/Bengaluru: Tech Mahindra Ltd, India’s fifth-largest IT services firm by market capitalisation, on Thursday unveiled its three-year plan, Project Fortius, to achieve a 15% operating margin. 

The move comes amid a significant setback for the company, with profits plunging 52% in FY24, marking its steepest decline on record. 

Under Project Fortius, Tech Mahindra will not be considering acquisitions, and instead, focus on organic growth, said Mohit Joshi, who assumed the role of managing director and chief executive officer from CP Gurnani on 19 December. By FY27, the company seeks to grow its revenue “faster than the top six or seven IT firms”, he added.

Read also: Bajaj Finance, IndusInd Bank, Tech Mahindra among 38 companies to report Q4 earnings on April 25

While Joshi did not delve into the specifics of how the margin target would be achieved, Rohit Anand, Tech Mahindra’s chief financial officer, said the company is planning “cost-saving exercises to stabilize the margin by next year, before growing further by FY27”.

Company’s margin in FY24 the worst among the top six IT firms

To be sure, the company’s margin was 6.1% in FY24—the worst among the top six IT services firms.

According to Joshi and Anand, Cost-saving initiatives will amount to reducing expenses by $250 million per year to reach its margin target. The move will also allow Tech Mahindra to make investments in new capabilities, leading to the rise in new revenue-contributing vertical by FY26, Anand said during the post-earnings analyst call.

Read also: Q4 Results: Tech Mahindra declares final dividend of 28 per equity, fixes record date

Additionally, Tech Mahindra has revamped its internal structure, with chief operating officer Atul Soneja coming on board in August 2023. “We are mindful of the fact that we have not delivered predictability of our financials in the past. We’re now very focused on driving that predictability. There will be volatility through FY25 since we’re in the middle of a turnaround, but everything that we’re doing right now is focused on bringing that volatility down,” Joshi said.

The company seeks to reduce the number of active clients, and focus on larger deals. “You want to focus on the most important geographies, verticals and clients. Every organization only has so much energy, and we want to focus it on where we see the most potential. Otherwise, over time, organizations get very complex, and the focus goes away—especially if you look at our focus as an organization, at scale and speed. We will be missing on the speed component, if we carry clients that add very little to our growth story,” he said.

To do this, Joshi said that the company will look to ramp-up deals with active clients, and focus squarely on its top 80 clients who offer business valued at $20 million or above.

Closer integration with the Mahindra Group across various verticals will also be in order, Joshi said.

Read more: Tech Mahindra Q4 Results: Net profit drops 41% YoY, dividend declared; 5 key highlights

For FY24, net revenue for Tech Mahindra dropped 5% to $6.27 billion, while for the March quarter, revenue dropped 1.6% sequentially to $1.55 billion. Net profit for the full year took a 52.2% tumble to $284 million—down from $598 million a year ago. The March quarter fared marginally better than the December quarter, with quarterly net profit recovering 29.5% sequentially after falling to just over $60 million in mid-FY24.

Equally concerning for Tech Mahindra would be its operating margin of 6.1%—the lowest of the top six companies by some distance. The company had closed FY23 at an operating margin of 11.4%, which has since dropped by 5.3 percentage points. Speaking of this, Joshi said, “The decline is predominantly driven by the revenue pressure that we saw (through FY24, from clients). From our perspective, we took some action on decreasing the portfolio of clients.”

Profit and margin appear to be key pain points for Tech Mahindra, which also missed analyst estimates. Bloomberg estimated the company to report $6.24 billion in revenue and $313 million in net profit—Tech Mahindra squarely missed the latter. For the March quarter, too, the company’s net profit missed analyst estimates by $10 million.

Joshi expressed confidence in the March quarter “marking a low point on a year-on-year growth trajectory. Obviously, there will be volatility between quarters, but there will be a year-on-year improvement.”

He also added that due to Tech Mahindra’s lopsided exposure to telecommunications clients, which it reports under communications, media and entertainment (CME), “volatility in spends is still very high.”

Analysts, on this note, expressed disappointment with Tech Mahindra’s overall performance. DK Mudaraddi, research analyst at brokerage firm Stoxbox, said, “The company’s inability to decrease subcontracting expenses and lower utilization makes us wary of the company’s approach towards efficiently managing resources.”

Tech Mahindra also reported a net headcount drop of 4.6% in FY24, with total employee count at 145,455 people on 31 March. The company’s entire revenue decline can be attributed to its loss in revenue from CME clients, which declined 12.4% over FY23 and leading to the company losing $330 million in incremental income from these clients.

On Wednesday, its closest peer LTIMindtree Limited also reported weak overall performance, with its operating margin of 15.7% falling far below its initial guidance of 17-18% that its chief executive, Debashis Chatterjee, had stated in April last year. However, despite the weakness, LTIMindtree still managed to post 4.4% revenue growth for the full year, and a 1.4% rise in net profit.

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First Published:25 Apr 2024, 09:42 PM IST
HomeCompaniesTech Mahindra targets 2.5x margin growth by FY27 amid drastic profit decline

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