Macro outlook very challenging: Tech Mahindra

Excerpts from CNBC-TV18’s exclusive interview with Vineet Nayyar, CP Gurnani and Sanjay Anand:

Q: How has this quarter panned out because topline seems to be in line with what the Street had expected, but bottomline came a little more than that?

Nayyar:  It was a good quarter for us. What you are seeing is a result of efforts that we initiated in the last 12 months. Our topline is around USD 272 million. It is up by about 5-6%.

Our EBITDA is around USD 70 million, which is an increase of almost 26%. Our PAT has also gone up significantly and is around USD 63 million, which is a significant increase over the last quarter.

So, what you are really seeing here is margin expansion. Margin expansion has happened on account of two-three reasons; one was what happened to the dollar but that has happened industry-wise. The other thing is the offshore component of our work has gone up, which gives us higher margins.

Our utilisation has improved. What you are seeing here is an overall expansion of margin and our transition costs of some of the long-term contracts that we had entered into were paid for in the last quarter. So, we did not see a large margin which you are now seeing with the transition having come to an end and are having taken on the new contracts with full strength and force.

Q: What is your EBITDA margin in absolute terms? It was 21.8% at the end of Q4. What is it right now? How is the outlook going to be for the margins?

Anand: Our EBITDA, sequentially, has gone up by about 380 basis points. One must remember that this is the quarter in which we have taken our salary increases, which was compensated by what has happened in the exchange rate. The uptick in EBITDA margins has really come as our utilisation is higher and offshore is higher. We have got a bit of SG&A leverage and the transitioning that we had last quarter. Some of it is complete. So, the combination of these things has given us a 380 basis point benefit as far as EBIDTA is concerned.

Q: Can you elaborate on the USD 1 billion deal that you have been working on? You had a 90-day exclusivity period for working out the deals. Can you throw more light on it?

Kalra: There is a slight confusion here. The USD 1 billion deal was something that we signed more than one year ago. In the previous quarter, we had done about USD 19 million on that BTGS deal. This quarter we have reported USD 25 million on that deal. I have been telling the street, analysts and investors that there is traction. We are improving, it is catching on and that finally has started to come true. So, we are on track for the USD 1 billion that we expected for the BTGS deal.

The other deal has been announced today, and it should be showing up on the stock exchange website.  as we talk. That is a USD 700 million of incremental new revenue on a five-year contract, again from a part of BT, which is linked with rationalisation of processes and systems.

Q: Regarding this deal which you are working with the consortium partner and the partner was supposed to pay a little bit of the upfront payment that you had taken, you have taken close to Rs 440 crore of hit in the last quarter and the consortium partner was supposed to pay you a little bit back. Is it going to happen in this quarter? Has it happened already or is it going to happen in the coming quarters?

Kalra: We are now in the phase of discussion. It is a USD 700 million of incremental new revenue for Tech Mahindra from a part of BT over a period of five-years. So, if I start adding up, in the last 1.5 years from BT, we gave you a billion dollar deal over a five-year period that started in the beginning of this year.

In March, there was a USD 350 million service management deal over a five-year period. Today, there is a USD 700 million deal again on a five-year period. So, it all adds up to north of USD 2 billion in confirmed revenues over the next five-years from BT.    

Q: What kind of pricing are you seeing in this incremental work? Are they margin accretive from hereon?

Kalra: Since all these deals are TCO deals, they will typically start with a J curve where there would be an initial phase of investment. You would have margins that would be in line with the rest of our business after taking care of the upfront payment.

Q: How is the non-BT side of the business doing? AT&T was supposed to revive as this fiscal started. Are you seeing early signs of it? What is your outlook for the next six months?

Gurnani: We have done exceptionally well this quarter on the non-BT side of the business. QoQ has been 14%. With respect to our US business, despite all the tremors we have seen in the market, it has grown by about 29%. So, AT&T as a business is doing well and the rest of the non-BT business is doing exceptionally well.

Q: Could you throw a little bit of light on how the deal pipeline is because we got disturbing signals from another BT vendor that they are trying to cut down on the work that they get because they do not want dependency on that? How are you taking it forward? Is your non-BT business growing at a higher rate? Are you getting USD 2 billion of confirmed revenues from BT?

Nayyar: Firstly, macroeconomic conditions are tough and the overall outlook is sombre. We made sure that we enter into long-term contracts, which will insure us from the changes and ups and downs of various economies and business needs. That is what is sustaining us through this period.

If you look at this quarter’s results they are possibly the best in the IT industry. Our strategy is paying off and will continue to pay off because we are not seeking one-year deals.

Most of the deals that we are securing are on a long-term basis whether it is BT or other clients. In fact, we have got another deal, which is not of the same size or close to it. But it is again for 5-7 years. So, this is what we are trying to do.

Our objective is really not to maximise earnings but to stabilise earnings. We want to see predictability and are getting to see it now. We are going to continue to make efforts in this direction and that is more important because we have visibility.

Q: What is the outlook on margins playing out in the next six-months?

Anand: About 1,500 people got added this quarter. As far as margins are concerned, we do not give guidance. But the first quarter in our business has always been very challenging because we take on the increase in salary cost; that is now behind us.

As we move forward, there will be a number of factors, which play on margins. There will be people joining us from the campuses. We will continue to focus very hard on utilisation and offshoring. All these factors are going to play into the margins. We don’t give guidance as to what the levels are going to be.