Tech Mahindra Q1 results: One of the toughest quarters I have seen in last five years: CEO CP Gurnani

Tech Mahindra's CEO and Managing Director CP Gurnani

After reporting a disappointing performance in the quarter ended June 30, Tech Mahindra's CEO and MD CP Gurnani said that this was one of the toughest quarters for the company in the last five years. This comes at a time when the business environment is getting challenging for IT companies with several major firms cutting down on growth guidance.

This quarter, Tech Mahindra's incoming CEO and MD Mohit Joshi also joined as a senior board member from June 19. Gurnani is set to retire on December 19.

Tech Mahindra's results were marred by decline on all fronts including revenue, profitability and EBIT margins -- it missed all the industry estimates. The Communications, Media & Entertainment (CME) vertical, which accounts for nearly 40 percent of the company's revenue, was the worst-performing segment.

"Revenue was down by over 4 percent QoQ, majorly due to a decline in the CME segment. While some of the drop could have been anticipated, some of the macro environment challenges and stretchy deal conversion cycles especially in CME have impacted the balance between the supply chain and the actual performance," Gurnani said while addressing the media.

He added, "Some of these challenges are temporary. We will bounce back in the next few quarters. This quarter was one of the toughest quarters I have seen in the last five years. But we believe we will be able to bring back growth trajectory over the next few years. We have great service offerings, a great team and a close customer association of over 1,300 customers."

Gurnani also mentioned that with the appointment of Joshi as the new CEO, the company is looking to reduce revenue contribution weightage from the CME vertical to win more deals in the BFSI, healthcare and other non-CME segments.

Joshi, an Infosys veteran with over 22 years of experience and expertise in the BFSI and healthcare sector, added that the company will recover from the challenges in the medium to long term.

Gurnani added, "These are uncertain times. With the impact of war on Europe, supply chain disruptions etc., the reality is there is a speed breaker right now which is influencing the industry."

Decline in deal wins

Tech Mahindra reported an order book of $359 million in the quarter ended June 30, 2023, a decrease of over 39 percent QoQ from $592 million in the previous quarter, due to weakness of the CME segment.

Order book saw over 55 percent drop on a YoY basis. In Q1FY23, the company had reported $802 million in deal wins.

This comes at a time when Tech Mahindra's peers such as TCS, Infosys, Wipro and LTIMindtree reported strong deal total contract value (TCV) in Q1, even though future deal conversion timelines remain uncertain.

Sector-wise, growth was largely driven by manufacturing which grew at 1.8 percent QoQ and the technology segment which grew 0.1 percent QoQ.

Other major verticals reported negative growth including the CME, which declines 9.4 percent QoQ, and BFSI was down by 3.2 percent QoQ. Retail, transport and logistics segments too remained negative.

The company, meanwhile, is also focussing more on building its generative AI capabilities having set up a studio in Q1. It has also upskilled around 8,000 associates of the company in generative AI skills.

Gurnani said that the company has invested a lot in AI platforms, and doubled down on investments in cloud, data and the 5G solutions. It is doing "reasonably" well with metaverse, blockchain and Web 3.0 technologies.

"We will continue to focus on the leading technologies. We are seeing a little bit of a slowdown in this quarter, but our investments will help us become better," he said.

Networks, generative AI, cloud and cyber security will continue to define the way Tech Mahindra is built, Gurnani pointed out.

A washout quarter

Tech Mahindra announced its Q1FY24 earnings on July 26. The company's net profit declined 38 percent YoY, which stood at Rs 692.5 crore for the first quarter ended June 30, as compared to the same quarter in the last fiscal year. Sequentially too, net profit was down by over 38 percent.

Consolidated revenue for Q1FY24 stood at Rs 13,159 crore, growing 3.5 percent YoY as against Rs 12,708 crore reported in the year-ago period. Revenue was down by 4.1 percent on a QoQ basis, as against Rs 13,718 crore reported in the year-ago period.

EBIT margin too was a major miss at 6.8 percent as compared to analyst estimates. It was down from 11.2 percent last quarter.

Tech Mahindra's net new headcount addition declined by 4,103 employees QoQ.