Company Analysis #3 - Tech Mahindra
One of the biggest IT players in India has shown weak fundamentals in the recent years. With the company undergoing organizational changes, can it show a strong turnaround?
About Company:
Tech Mahindra is the 6th largest IT company in India and is part of the bigger Mahindra group. Tech Mahindra offers innovative and customer-centric digital experiences, facilitating enterprises, associates, and society to utilization of next-generation technologies such as 5G, Metaverse, Blockchain, Quantum Computing, Cybersecurity, Artificial Intelligence, among others, to support end-to-end digital transformation for its global clientele. The organization, valued at over USD 6.5 billion, comprises more than 146,000 professionals operating across 90 countries, serving 1250+ global customers, including Fortune 500 companies.
For past 10 years, Tech Mahindra has outperformed Nifty as well as TCS that is considered as the industry benchmark.
Company Market Profile:
Customer Profile:
Tech Mahindra derive about 50% of their revenue from the Americas region. Rest 50% are equally distributed between Europe and RoW. While the exposure to Americas might seem excessive, Tech Mahindra is one of the better diversified Indian IT company in the market. With nearly a quarter of its revenue exposure to Europe, TechM has growing revenue from this region as the European companies are looking to invest more on digital transformation activities.
The company primarily services clients in six sectors as listed below:
Communication, Media & Entertainment (CME): CME is the biggest sector for Tech Mahindra accounting for about 36% of the revenue. The CME vertical provides a wide range of solutions tailored for Communications Service Providers (CSPs), Telecommunications Equipment Manufacturers (TEMs), Independent Software Vendors (ISVs), and the Media & Entertainment sector. 5G seems to be the main focus of the company in this vertical. It leads the 5G space, serving several top 10 CSPs. Most of the business of the vertical comes from modernization initiatives like cloud, SaaS, and engineering.
Banking, Financial Services and Insurance (BFSI): BFSI makes up about 16% of the company’s revenue. In the recent years, BFSI sector has emerged as the sector leading digital transformation initiatives. Tech Mahindra’s exposure to BFSI has meant a revenue expansion from this vertical as it has grown at 15% CAGR for past three years. The company has seen 28 new customers in the segment and over half of the revenue has come from modernisation initiatives like cloud, engineering, connectivity, customer experience and ESG.
Manufacturing: Deriving around 18% of their revenue from this vertical, Tech Mahindra serves 8 out of 10 top manufacturing companies in the world. The core focus areas in this vertical are Electric Vehicle (EV) and Electrification, Industry 4.0, and Sustainability.
Technology and Hi-Tech: Makes up about 10% of the revenue, this sector is the fastest growing vertical and has won 19 new customers in FY23. The segment addresses product development, infrastructure transformation, enterprise IT and digital transformation needs of Hi-Tech industry to drive superior user experiences. And, the solutions are delivered in four sub-verticals: Hyperscalers, Platforms & Independent Software Vendors (ISVs), Semiconductor & Storage, and Infrastructure Technology.
Healthcare, Lifesciences and others (HLS): The HLS (Healthcare and Life Sciences) vertical at Tech Mahindra is a specialist in the provider segment in the US, having touched the lives of over 850 million people globally. In the fiscal year 2023, the HLS vertical won 13 new logos, and over 60% of its revenues came from modernization initiatives, including cloud, digital, analytics, and enhanced user experiences.
Retail, Consumer Goods, Transport and Logistics (RCG): TechM's Retail and Consumer Goods (RCG) industry expertise helps clients meet evolving customer demands for seamless omnichannel experiences, hyper-personalization, and sustainable supply chains. By offering a comprehensive suite of consulting services, proprietary solutions, and cutting-edge technologies like 5G, Generative AI, and IoT, TechM empowers RCG companies to deliver exceptional customer experiences, drive high growth, and achieve operational efficiencies - positioning itself as a trusted digital transformation partner for the industry.
According to the company’s recent quarterly performance report, the number of active clients for the company has gone down from 1290 to 1228. The company has attributed this downfall mainly to macro-economic conditions citing that clients are not very enthusiastic about signing new deals and on discretionary IT spending. The revenue share from Top 10 clients has seen a marginal decline of 1% y-o-y. On the positive side, the number of clients spending $50MM+ has gone up from 24 to 26 over past year.
Product Offerings:
Tech Mahindra is a specialist in digital transformation offering IT services with a ‘human-centric’ approach. They offer a variety of services and an overview of all the services are shown as below:
The company primarily focuses on 5 ‘core-technology’ areas i.e. Connectivity, Cloud, Experience, Sustainability and Engineering.
To keep themselves relevant in the technology space, Tech Mahindra keeps on re-innovating and launching new services encompassing frontier technologies. The upcoming technologies that now has the major focus are:
5G Innovation: The global adoption of digital transformation is increasingly commonplace among enterprises. The integration of 5G-powered capabilities, use cases, and market opportunities is poised to catalyze the forthcoming wave of digital transformation, fundamentally altering the dynamics of our work, lifestyle, and recreational activities. Forecasts suggest significant potential, with an anticipated cumulative consumer revenue of USD 31 trillion by 2030, indicating substantial opportunities ahead.
ESG Solutions: ESG (Environmental, Social, and Governance) stands as a priority for businesses in the current landscape, presenting significant opportunities. Within TechM, there has been a strategic utilization of next-generation technologies to develop comprehensive and durable end-to-end ESG solutions aimed at expediting sustainable transformation. These initiatives are designed to facilitate businesses in assessing, tracking, and enhancing their sustainability performance, thereby aiding in the achievement of ESG objectives while adeptly managing associated risks.
Generative AI: Recently Tech Mahindra inaugurated their Generative AI Studio platform to assist enterprises in content creation including code, text, images, data, and video. The platform provides a user-friendly interface along with customizable features tailored for enterprises to kickstart their implementation of generative AI and attain high-quality outputs at an accelerated pace. By consolidating six key elements encompassing code, text, image, video, audio, and data, it empowers businesses to generate, enhance, and refine various forms of digital content. Moreover, it facilitates a quicker adaptation to generative AI through TechM's XaaS (Everything as a Service) model.
Corporate Governance:
Tech Mahindra is currently chaired by Mr. Anand Mahindra. He is also the chariman of the Mahindra Group, and has led the conglomerate through a period of remarkable growth and diversification during his tenure. Under his leadership, the Mahindra Group has expanded its footprint both domestically and internationally, venturing into a diverse range of major industrial sectors, including automobiles, agriculture, IT, and aerospace. The Group has also pursued an inorganic growth strategy, acquiring companies such as Peugeot Motorcycles in France, Holiday Club Resorts in Finland, and the iconic Italian design firm Pininfarina.
Q3FY24 saw couple of shuffles in the top Management.
Tech Mahindra has announced the appointment of Richard Lobo as the Chief People Officer (CPO) of the company. Prior to this role, Lobo served as the Executive Vice President and HR Head at Infosys Ltd. He has also held the position of director on the Boards of Infosys Consulting and Infosys China, bringing a wealth of experience and expertise in human resources and organizational leadership.
Tech Mahindra has announced the appointment of Peeyush Dubey as the Chief Marketing Officer (CMO) of the company. Prior to this role, Peeyush held the position of Chief Marketing Officer at MathCo. He has also served as the Executive Vice President and CMO at LTI, where he made significant contributions. Additionally, Peeyush has held leadership roles at companies like Mindtree and Infosys, further strengthening his extensive experience in the technology and marketing domains.
Key Company Risks:
The company has a robust Enterprise Risk Management (ERM) framework and has comprehensively established risks that posses a threat to the company. Below are few of the key risks:
Risk of Economic Slowdown or recession in key global economies: The Indian IT industry, including Tech Mahindra, is facing macroeconomic headwinds that are impacting business sentiments and customer behavior. These headwinds include muted GDP projections, unrelenting inflation, high interest rates, and instability in financial systems, which are causing uncertainty and leading to cautious behavior among customers. This uncertainty has affected Tech Mahindra's profitability, as evidenced by a decline in net profit and revenue growth. The company has reported a 38% decline in net profit and a 3.5% growth in revenue compared to the previous year. The BFSI and CMT verticals, which are significant for Tech Mahindra, have also been impacted by these macroeconomic challenges.
To mitigate these headwinds, Tech Mahindra has implemented a centralized delivery structure for IT services, reduced the number of strategic business units, and is focusing on efficiency as a lever to fund future transformations. The company has also announced a turnaround strategy, which includes long-term investment plans and employee policies. Despite these challenges, Tech Mahindra remains optimistic about the future, expecting the second half of the calendar year to see recovery in the BFSI and retail segments.
M&A and Technology Risk: Inability to integrate with acquired portfolio companies, timely adopt emerging competencies, or develop/acquire new technologies can have significant implications for Tech Mahindra. These challenges can result in financial losses, damage to reputation, decreased productivity, loss of employee morale, and legal issues. Additionally, the inability to timely adopt emerging competencies can lead to a competitive disadvantage. Developing or acquiring new technologies and capabilities, and organization-wide adoption, have significant cost implications. The company has faced difficulties in integrating with acquired companies, such as Satyam, and has had to deal with legal liabilities arising from class action lawsuits by U.S. investors. The company has also had to navigate the challenges of a highly competitive market and the evolving technology landscape, which require continuous investment in emerging competencies and technologies.
Management Discussion and Analysis:
Analysis of the recent earnings call for Q3FY24 has highlighted the following for the company:
TechM is undergoing a turnaround phase in which the company is undertaking investments to maximize the long-term earnings potential. They company has also made some hierarchical changes in organization and reporting for better realization of synergies.
Revenue has shown a marginal decline y-o-y and the major growth driver in the past quarter has been the Manufacturing vertical where the company is heavily leveraging its presence in automobile industry. Retail segment saw an uptick due to the holidays season and the other verticals are experiencing contractions due to furloughs.
Tech Mahindra is witnessing a surge in the adoption of AI and Generative AI (GenAI) among its clients. These applications are evolving beyond basic functionalities like document summarization and chatbots, moving towards utilizing GenAI for significant business transformation. For instance, clients are employing GenAI to optimize energy consumption in cell towers, utilizing AI for art restoration to seamlessly repair damaged artworks, and swiftly revamping extensive product catalogs to launch new stores in response to market demands, even for large retailers.
Tech Mahindra's dedication and expertise in AI and GenAI have garnered recognition within the industry, with the company being acknowledged as a leader in various analyst ratings. As part of its strategic vision, the company aims to train 100% of its IT workforce in AI by FY'25, solidifying its commitment to staying at the forefront of technological innovation.
Financial Summary:
Revenue and profit Analysis:
Tech Mahindra has shown a 10-year revenue CAGR of 23% and 5-year revenue CAGR of 12%. Revenue growth has been on a decline with TTM revenue growth of just 2%. Same is the case for Net Profit margin which has 10-year CAGR of 14%, 5-year CAGR of 6% and TTM growth has been -46%. This is mainly due to some large customers being reluctant to make discretionary IT spending as well as the company going through organizational changes.
Key Financial Ratios:
Shareholding Pattern:
Shareholding pattern for Tech Mahindra is in accordance to other Tier-1 IT companies. FIIs have generally poured in money to small and mid cap companies in the last year. DIIs have been doing most of the buying of the stock in the recent years.