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

Tech Mahindra Ltd started the second half of the financial year with modest sequential growth, outlining a cautious future even as it is nearing the halfway mark of its three-year revival plan, which has seen operating margins double.

The Pune-based IT services company reported revenue of $1.59 billion in the July-September period, up 1.4% sequentially and down 0.2% year-on-year. Most of the growth came from manufacturers, which accounted for three-fifths of the company’s $22 million in incremental revenue. Net profit increased by 1.5% to $135 million.

Company management said that the macroeconomic environment has stabilized, but concerns remain.

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“From a macro perspective, we see the macro stabilizing and perhaps partially recovering. But it is still fragile. It is unlikely that there will be any V-shaped recovery in spending, but we are seeing some stabilization and hopefully growth in the second half of the year,” Tech Mahindra CEO Mohit Joshi said in the company’s post-earnings press conference on Tuesday.

Tech Mahindra shares closed 1.2% higher ₹1,468.15 per capita on BSE on Tuesday.

The company’s mixed signals contradicted those of its two peers.

A day earlier, the management of India’s third largest software services firm HCL Technologies Ltd had said the macro environment was more or less unchanged. This contrasted with larger peer Tata Consultancy Services Ltd, which said there was “prolonged uncertainty” in the broader economic environment.

TCS and HCL finished the second quarter with revenues of $7.47 billion and $3.64 billion, up 0.6% and 2.8%, respectively.

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AI focus

Both major companies have made major AI announcements. While Mumbai-based TCS announced plans to invest more than $6 billion over a six-year period to build and operate a 1GW data centre, Noida-based HCLTech became the first company among the Big Five of Indian IT to disclose revenue from new technology. Last quarter, it generated $100 million in revenue led by artificial intelligence.

Tech Mahindra, on the other hand, is betting on big language models.

“We are partnering to develop a native, independent, large language model with 1 trillion parameters, a major technical milestone that places it among the largest AI models in development globally,” Joshi said.

However, it did not disclose investment details and questions about project timelines remained unanswered.

Instead, management said the company is investing in talent rather than data centers.

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

The company finished the September quarter with an operating margin of 12.1%, up 100 basis points from the previous quarter. Management attributed this to “increased productivity, initiatives around fixed-price projects, some volume growth, savings on sales, general and administrative expenses, among others.” A basis point is one hundredth of a percentage point.

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

Although revenue growth did not exceed 3% last year, margins 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) of $816 million was also at its highest ever since 4FY22. Healthy growth coupled with continued margin expansion strengthens confidence in the company delivering on its three-year turnaround plan outlined at the end of FY24,” said Manik Taneja, managing director, IT services, Axis Capital.

Tech Mahindra, which did not give a quarterly or annual outlook, said technology spending on IT projects would also follow.

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

“As overall economic activity increases around the world, we think technology spending will follow,” he added.

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

Another bright spot was its profitability, which has increased for eight consecutive quarters.

The company hired 4,197 people last quarter, with 152,714 employees. While HCL hired more than 3,000 employees, TCS reduced its headcount by more than 19,000 people.