In a chat with ETMarkets, Anand also talks about why Tech Mahindra will be the biggest beneficiary in 5G and how the company is turning attrition into attraction. Edited excerpts:
In Q1 your EBIT margin was at 11%, which is a reduction of 220 basis points QoQ. By when do you think you would be able to reverse this trend?
We began this fiscal with a commitment to deliver consistent organic growth. Our EBIT margins have been under a little pressure due to higher salaries, sub-con related costs, and some large deal transition costs that we saw. However, we feel this quarter is the bottom for us from a margin standpoint and expect margin expansion in the second, third and fourth quarters of this year, provided the macro stays where it is.
Additionally, we have taken bold steps in developing some of the capabilities, like, 5G, Metaverse, the Makers Lab, that we set up at eight different locations, continued investing in data, AI labs, the sports tech vertical with platforms like Fan Nxt .Now, new platforms like netOps.ai. and much more to deliver differentiated offerings. We have attempted to remain resilient while responding to market changes and addressing customer expectations effectively. I foresee all this coming together to ensure that we maintain our profitability margins while accelerating the growth momentum in the future.
Deal wins were strong with TCV at $802 million. What is the outlook on the demand side for the next couple of quarters?
Our deal flow has been strong. If you see, we are in the range of $800 billion of deals over the last almost six quarters now. For the deals, the margin upside starts kicking in after 18 to 24 months and over a five-year cycle. Currently, digital transformation is a focal point for the industry as remaining relevant necessitates it. Considering this, catering to the supply-chain remains imperative, allowing us to extend our services in the areas of cloud, connectivity, engineering, and experience. In this direction, we have witnessed a significant uptick and sustained momentum, which in turn has increased our deal wins numbers over the last few quarters.
Being in the zone of the continued demand environment and having successfully integrated a whole host of acquired capabilities has made us more relevant to our customers’ needs as we can offer them a wider range of solutions to choose from. I believe the big deal momentum is set to continue as we aspire to use technology to create a transformative impact on communities, and that does put us on a reasonably good footing as we look forward toward the remaining financial year.
Do you see signs of slowdown in the US-Europe market?
So far, events unfolding at a macro level, are not giving us any indication of slowdown, in the kind of opportunities that we are engaged in. Our pattern of work has remained unchanged and so has the funnel we are building.
Analysts are worried about the impact of a probable recession in the US. How worried are you?
Although there have been minor signs of a probable slowdown hitting the US, the official forecast still stands at nil. Undoubtedly, the connection between Indian IT and the US economy is far too deep for one to remain unaffected by the other, thus, it does become a cause for concern for the entire Indian IT industry if recession hits the US.
However, with appropriate measures in place, like tackling the inflationary pressure, managing hiring sprees, the Indian IT sector as a whole has pushed against the fears of a recession here. When we look at our customer interactions right now, we have not seen any significant deviation from where we started the year with. But these are very dynamic scenarios. So, we have to continue to have those dialogue interventions, pretty close to them, and continue to monitor it.
My assessment of the current situation is that if there is a recession, the impact of a lurking US economic slowdown will possibly be seen for a short period here as well, only to be followed by a boom in Indian IT, as the value proposition of India for IT talent at scale is intact.
How big an opportunity 5G can turn out to be for Tech Mahindra?
Today, digital transformation is the norm for enterprises across the globe, aiding which, 5G-powered abilities, use cases, and market opportunities will revamp the way we function. If you look at current penetration of 5G across the board for communication service providers, it’s in the rate of 15% to 20% adoption. 5G will form the core building block of massive connectivity and customer engagement in this digitally connected world, and its adoption will create a new set of services to fuel technology spends.
On the 5G theme, I think Tech Mahindra will be the biggest beneficiary. We are positioned well because we are a 40% communication player with a huge domain expertise. As a firm that is so heavily invested in the telecom industry, Tech Mahindra’s strong play in network infrastructure services will be further modernized/enhanced through 5G. Again, its advent will allow us to serve enterprises and the ecosystem with enhanced experiences as well.
So, 5G is a three-dimensional business opportunity for us and the organization is well-positioned to capture a fair share of 5G network services spends. Forwarding this foresight, we have also inaugurated a 5G Lab as an innovation center to help customers co-create and co-innovate 5G powered solutions. Undoubtedly, Tech Mahindra is to see immense activity levels around 5G over the next 3-4 years.
How does the attrition rate look like this quarter?
Attrition has been turned into attraction at Tech Mahindra, where we are leaving no stone unturned to loop in talent and retain them. To mitigate the high number of employees leaving the organization, Tech Mahindra has deployed measures such as broad-based hikes, promotions and retention incentives including professional growth opportunities, to stem the attrition. Understandably, businesses today are operating at a higher attrition rate, but we are seeing some stability and even reversal of the trend. It is heartening to say that attrition has reduced quarter-over-quarter sequentially by close to 2% based on various interventions we took structurally over the last few quarters.
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