Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of Tech Mahindra Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

[Chander Prakash Gurnani, MD, CEO & Director]

Good evening. Good morning, and welcome to Tech Mahindra Q1 '21 results. Thank you all for joining us today. I know these are unprecedented times. And in a lot of ways, world over, people are still trying to balance lives with livelihoods. I hope all of you are staying safe and healthy. Quite a bit has changed over the last 4 months. We have directly seen the declines in the GDP growth. We have seen various intensities of pandemic. But the positive side is that this balancing between life and livelihood means businesses are also getting back on track. So in IT sector, some of us have now adjusted to the new normal of remote working. On the other hand, we have also taken some very proactive steps to make our workplace safe place to work. We introduced an integrated platform called Mhealthy, which is really a blood test at the time of people coming in, which is basically to making sure that the antibodies are present. And we are ensuring that our employees have a good working environment at home, they are open to having any kind of counseling, whether it is related to data, related to work, related to a person, related to mental well-being. And we have seen that the employees continue to remain engaged with your company. Gratifying to note during the quarter was that your company in India was adjudged as the Best Great Place to Work in mega employer category. Mega employer means more than 50,000 employees. We have also been rated the best in career management. Overall, with the top 100 companies, we were rated at 21st. I know there's still a lot of headroom for us to do better, but considering that 95% of us were now working from home, only 5% to 6% against a very, very well designed safe place to work are working from the offices. The quarter, the senior management of Tech Mahindra when they sat together and when we looked at the reports from various analysts around the world, we looked at the reports from various big consulting companies, we had assumed a relatively, I would say, a tougher quarter. Not that this quarter has been easy. But last year -- sorry, last quarter, when we got together, we have set ourselves 3 priorities. Number one was cash flow management. Your company has reported a free cash flow of $317 million, which is the highest, and I'm glad that we've focused on free cash flow. Number two was, we had said that we will start looking at each line item, each penny that we are spending, we used a team of data analysts. We used a lot of decision-making tools under the Chief Transformation Officer's office, but 100 data scientists work with our CTO, Simmi. And what we are seeing is that now she has an aggressive plan for the rest of the year. Those 100 data scientists have more or less assured us through the CTO office that our margins will continue to improve because now we are literally measuring in micromillimeter. It's the first time the Chief Transformation Office is really using industrial management processes to work on our profit margin. Profit margins is a function not only of eliminating costs -- unnecessary costs, but it's also an element of redesigning some of the processes, redesigning some of the structures that we had. It also means is that we will bring in more advanced tools to deliver. I think all of these actions have been put in place. And I'm hopeful that our profit margins will continue to improve over the next few quarters. Number third is really about the growth. On the growth side, we -- clearly, all of us are of the relevant same world and the same environment. We have analyzed growth to look at customer segments, whether they are in telecom, media and entertainment or in manufacturing; if in manufacturing, whether they are in aerospace or automobile. So we have done that analytics. And we have done a fair amount of modeling on where the growth will come from. We have prioritized on it. Some of our sectors which had not done too well in the previous quarter, for example, BPS, and I'm sure when Ritesh talks to all of you, he will tell you that BPS has come back to almost normal. Similarly Network Services, while the network usage has increased, data has increased, but as a business, Network Services business was not -- it did not take off in the previous quarter. We think there will be a recovery. The calculated guess is, it will be a relatively not so fast a recovery, whereas in BPS, we are seeing a fast recovery. But the company will continue to pivot itself on 5G, company has done extremely well on human experience management, customer experience management. And Ritesh, again, will cover. We have successfully regrouped and reimagined all our customer processes. And we also looked at branding. We have looked at digital marketing. We have looked at the digital transformation. And all of them are being regrouped together. So the company is making some structural changes, but that is an area of focus. The third area of focus for us was the way we are running our operating companies, particularly the companies that we have bought. There is a plan which led by our HR Head, Harsh; and CFO, Manoj, we are putting it together to integrate the back offices, to successfully build a shared services center for all these operating units. So I would say is that cash flow management, cost management, growth prioritization and, last but not the least, integrating all the operating companies, both on the front office side and on the back office side, definitive action plan has been done. I mean I would like to claim that the worst is probably behind us. And it is our endeavor to transform, to come out leaner, stronger and build solutions around some of the spend areas. I actually would like to congratulate, on your behalf, the management team because they have shown agility, they have regrouped themselves and in a lot of ways, taken some of the lessons from the previous playbooks that we had faced during the 2009 crisis and refined those playbooks. And together all of us believe that we are making Tech Mahindra a stronger company. To take us through the last quarter's commentary, I'm going to invite Manoj Bhat.

[Manoj Bhat, Chief Financial Officer]

Thank you, C.P. All of you have seen the numbers. So I think I'll just add a few salient points before adding it -- opening it up for questions. So if you look at the numbers, of course, revenues declined by about 6.7% to $1,207.5 million. If I look at the drop from another perspective, about 7% of the drop was related to COVID. And when we look at it, about 1/4 was coming from the supply side and about 3/4 was coming from the demand side. We also had, obviously, incremental revenues coming from some of the new acquisitions, which we integrated during the quarter, which is offset by the currency headwind and our VAS and mobility business as a seasonal weakness. So those 2 are kind of offsetting each other. Coming to the EBIT margins, C.P. did outline some of the measures we took in terms of looking at costs, looking at optimization, looking at cost avoidance in terms of what our discretionary spends and so on and so forth. So all of these measures helped us improve margin by 200 bps during the quarter, which offset the COVID impact on the margins. We also had in Q4 a onetime on CSR spend and provisioning, which is about 120 bps. And that was not there this quarter. So that did actually help in terms of the margins as well, and the currency was a positive. Offsetting that was the visa cost and seasonality of the Comviva business. So net-net, I think, if I look at all of these measures, these have led to a slight improvement in margins in an exceptionally tough quarter, both from an environment perspective, also from a seasonal perspective. If you look at all the Q1s in the past, we have had this challenge around the seasonality of the mobility business and the H1B visa costs. Coming to other income, it was up to about $11 million on ForEx gain, which is a improved number from the previous quarter. Within the other income was also about a $20-odd million of onetime in terms of 2 things. One is we got a tax refund of about $60-odd million, which had an interest component, which we accounted in other income and also some earn-out payments from some of the subsidiaries we had sold in Comviva sometime back. So those are also accounted in here.Coming to the cash flow. $317 million is an all-time high. Within that is embedded a $60 million benefit coming from the tax refunds, which is not usual. Also, we had some customers who actually helped us during this time in terms of actually paying in advance of the due date. So that has also helped. But even if I exclude those, right, I think from an overall cash flow perspective, it will still be the highest quarter we would have ever had. So -- and this has led us to reduce some debt. We have reduced about $50 million of debt during the quarter. Cash and cash equivalents have gone up by almost $214 million. And the hedge book, we continue to follow our policy, it's about $2.3 billion. What I wanted to do is throw it open, I know you guys have a lot of questions around the business and some of the numbers. We will try to address them together as a team. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

Congrats on good execution. So I have 2 questions. One on the strategic side. And second on the demand side a bit. So first of all, on the strategic side, C.P., if you can actually give some color on how do you see the medium- to long-term growth on the enterprise side primarily given the past acceleration which has happened on the technology adoption side? And secondly, what is your sense on the 5G CapEx? How far has it been pushed out? Do you see that there is some of it, which will be permanently gone? Or you think that it is just a postponement and not -- it is not lost at all.

[Chander Prakash Gurnani, MD, CEO & Director]

So Sandip, let me first take the 5G because it's got an implication on enterprise also. I divide 5G into 3 groups. 5G for a communication service provider, 5G for enterprise and 5G for ecosystem. The 5G for ecosystem means what are the business opportunities for designing a new handset, designing a new app or a new application for the games. Because now that the bandwidth is available, I mean, you need all equipment, you have a lot more to play around it. I think that market is already on. We are doing at least 3, 4 new handsets for some of the very, very well-known brands, where we're doing functional design, we are doing electronic design and for one odd person, we are also even doing the styling. So that business has started. Applications part also has started. 5G for enterprise, the funnel buildup is very strong, but I don't see decisions happening in a hurry. Main reason being is that the biggest first applications were coming in from IoT, Manufacturing 4.0 and those applications are -- currently, the manufacturing sector is redefining its supply chain. And the second set of requirement was coming from the other service sectors. And they have, in a hurry, decided to launch Health Next or Education Next. And so at this stage, they are not going to immediately redesign the applications for 5G. But 5G in enterprise is a bigger requirement than anywhere else. Because the consumer is actually very happy as long as he gets good network speed and a good voice quality. The communication side, I think it is more of a setback of 5 months, certain cases, 7 months, where, a, the geopolitical war, equipment A can be used or not used. And number two is the spectrum which has to be auctioned and given. But if you were to ask me purely from a business point of view, I think it is a delay, but the business is there, and we are going to continue to work on 3 different vectors for 5G. And we are happy that the Rakuten rollout has happened. You did see one of the -- not our announcement, but BSNL looking at Atmanirbhar which means something which is locally designed and manufactured 5G equipment and services. The only reason I'm pointing it out to you is that in today's environment, if BSNL can look at the local stack, many, many countries are now open to looking at the software-defined network or the virtual stack that we would specialize in. Again, sorry for the long answer, Sandip. The second step you said on enterprise, I have always told you that my best headrooms are actually in enterprise. Our BFSI has done reasonably good. Our retail online business has done reasonably good. And overall, I continue to see high growth in HLS, the provider space, you've seen one of the big deals that we announced in HLS. And one of my leaders, Ricky Caplin and Vivek Agarwal are doing a very good job there. High tech includes Google, Microsoft, Oracle and some of the unicorns, which are high tech. I mean it's doing extremely well. So I think as a strategy, we will [ refresh ] and continue to be nimble and agile. We will continue to prioritize enterprise sectors where there is a quicker decision making, but the reality is we will invest even more in building at scale digital service lines, whether they are in digital transformation, under more, whether they are on customer experience management, whether they are on human experience management or in cloud security or data. So I know it's a long answer, but Sandip I wanted to cover everything.

[Sandip Kumar Agarwal, Vice President]

Best of luck for the current quarter.

[Chander Prakash Gurnani, MD, CEO & Director]

Sorry, I didn't get it.

[Sandip Kumar Agarwal, Vice President]

Best of luck for the current quarter.

[Chander Prakash Gurnani, MD, CEO & Director]

Thank you. Thank you, Sandip. Thank you so much.

[Operator]

The next question is from the line of Kawaljeet Saluja from Kotak.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

It's Kawaljeet here. Congratulations on a good quarter. And also thanks for the revamped data sheet. That makes life a lot easier. I have a few questions. I'll just restrict myself to a couple of the important ones. The first and foremost is that this quarter seems a little bit light on total deals. Any thoughts around it as to why it is so? And can you just provide an update on the pipe? And how does it compare to the pre-COVID levels?

[Chander Prakash Gurnani, MD, CEO & Director]

Manoj, do you want to take it. Kawaljeet, good to hear from you, but I'll let Manoj take this question, please.

[Manoj Bhat, Chief Financial Officer]

So Kawaljeet, I think while on an absolute basis what you're saying is right, but if I really look at the quarter, I think it's almost like the first couple of months, the first half of the quarter, was where, obviously, there was hardly any movement on deals and whatever momentum we are seeing is in the latter half of the quarter. If I look at our overall funnel also, I think that the funnel size is higher, but, of course, I do believe decision making will be slower. So from my perspective, as we look at it, I think, clearly, there's been an acceleration through the quarter. But I will invite Manish and maybe Jagdish to give us a little bit of more color on this in terms of deal wins and funnel and what they are seeing in the marketplace. Manish, can you go first?

[Manish Vyas]

Yes, absolutely, Manoj. So I think Kawaljeet, like Manoj said, the first half of the quarter or, I would say, 3/4 of the quarter was mostly spent by the major operators in getting their networks bandwidth allocation within their operations right. So clearly, bulk of the management's attention was on just keeping the lights on. And what they have done and we have done together with them is nothing was done spectacular given the manner in which the networks have to be readjusted with hold deals and new access, hold deal as the extension of the enterprise. So large part of the time went into that. So clearly, all conversations around new deals was pushed. And as a result, you see a lower deal wins for the quarter. To your question about pipeline, I believe that the funnel has not looked better than this in a long time. There are some interesting conversations across the world with major operators and a wide range of spectrum offerings, from on-field to digital to network to operations. So I think it looks good, and we continue to work hard. I'm hoping that as things settle and while there is still unpredictability around how will this pandemic play out, but there is clearly an active conversation, a lot more progress and faster progress, people have learned how to work digitally to start driving decisions. So I do expect -- [ let's go for it ].

[Jagdish Mitra, Chief Strategy Officer & Head of Growth]

This is Jagdish. Thanks, Manish. So on the enterprise side, I think there are a few things that are noteworthy. One, obviously, from a pipeline perspective, especially in the U.S., our pipeline has been strongest in 3 years. So there is a large amount of work that's happening around total outsourcing and around large deals. So especially, in U.S., I think we see a large strong pipeline development that has happened. And yes, we expect deal closures over the next few months as we look into it. From a vertical perspective, actually, the pipeline has grown across the company in various aspects. And the good part is if you look at the demand, which is input into the pipeline, it hasn't actually slowed down. The input has been strong, but we probably expect a lot more as we get into the end of this. Q1 has been more towards closures that have started to happen, which was not so earlier. So which is why you probably didn't see a significant number of deal win announcements or the volume of deal TCVs dropping in Q1. But I think the projections across the region and across a few other sectors, especially BFSI, HLS and high-tech, are pretty strong, and we are seeing manufacturing picking up as well as start to the PMI index pushing up higher in Europe. So I expect about Q2 and Q3 to start showing much better results and slowly coming back to our norms of large deal announcements or TCV announcements.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

Okay got that. That's very helpful. The other question that I had is performance of acquired entities. Now some have done well, some have not done well. But then as a portfolio, it has been patchy in the past. Can you just provide an update on how the key entities have performed -- the key acquired entities have performed in the quarter and mechanisms that you have put in place to ensure a more sustainable improvement? And once you get to the desired level of improvement, what's the kind of margin flex one can expect? And the other question I had was for Ritesh, which is that there's a belief that the contact center work will be automated or fundamentally reshaped in the post-COVID world. I mean how well is Tech Mahindra positioned to tackle this challenge? And Ritesh, are you happy with the current mix of business between non-voice and voice? And how do you wish to address the same?

[Manoj Bhat, Chief Financial Officer]

So Ritesh, you want to go first, and then we'll pick up the portfolio question later.

[Ritesh M. Idnani, President of Business Process Services]

Yes, absolutely. Thanks, Kawaljeet, for your question. So as you saw in the last quarter, we did have a challenging quarter, and COVID-19 had a material impact on our business in the fiscal first quarter, where net revenue came in about 13% lower on a quarter-on-quarter basis. That said, as you are aware, most of this was primarily because it was a full quarter of COVID-related supply and demand impacts. And we saw that this is pretty much distributed evenly between the demand side and the supply side. Given that we are at now from a work-from-anywhere enablement standpoint for the workforce standing at close to 92%, we think that, as C.P. mentioned right at the outset, the business is starting to demonstrate a recovery. What we do believe, Kawaljeet, to your broader question is the fact that the 2 design principles around which we had architected the business now for the last several years, which is cannibalization of our own business through extreme automation and deliver through business outcomes, if anything else, continue to remain even more relevant in the current environment and actually get accelerated, thanks to the pandemic itself.So what we are seeing is a few different things. Number one, we are seeing a shift in some instances from voice to chat or voice to instant messaging and other such digital channels. And we are able to capitalize on that as part of our overall front-office orientation itself, which we believe gives us an advantage relative to some of our competitors, both on the traditional call center side as well as some of the players who focus primarily on the back-office side. And number two, if you look at our mix on the non-front-office side, that has steadily been going up in terms of contribution from what was -- from what is today about 25% of our BPS business. We expect that to continue to increase in share, as we take technology and platform-led offerings to create a consumption model for different horizontal and vertical areas as well. So we think the dual-pronged attack of doubling down on what we are doing on the front office side and executing on what we said are the 2 design principles and using technology and platforms to continue to penetrate the back office, gives us a wider market to play. And we are seeing the offshoots of that from a strategy standpoint and from an execution standpoint play out as early as this quarter itself.

[Manoj Bhat, Chief Financial Officer]

Thanks, Ritesh. Kawaljeet, on your other question on portfolio. I mean, clearly, I think we look at it as a group of companies, where we are trying to do certain things in terms of standardization around the back-end and the back office as well as drive revenue synergies. I don't think we can get into each and every one of them. I think, clearly, as spoken about in the past around some of them which are troubled, which is around Pininfarina, we've spoken about this. We've spoken about some issues in our Brazilian subsidiary. But what I'll do is, Vivek, if you're on the call, at least can we outline the principles of how we are approaching portfolio companies and summarize in terms of our approach to performance management as well as driving more synergies and greater cohesion with the overall Tech M ecosystem. Vivek?

[Vivek Satish Agarwal]

Sure, Manoj. Hi, Kawaljeet. So C.P. in his opening address referred to more closer integration across the acquired entities and the parent company across back office, shared functions and closer sales integration. So that's a theme which cuts across all our portfolio companies. As we move forward, we would continue to accelerate on that. Our new acquisitions are landing in a more integrated fashion within the parent organization from day 1. So that's a thematic direction in terms of the overall portfolio and new acquisitions. I think rather than -- as Manoj said, rather than going to individual businesses, clearly, auto as a sector, we've seen -- there is a demand challenge right now in the sector. So there is an impact there. Health care provider in the U.S. is, we've announced a large deal win in that space. So we continue to see massive opportunity. But in the short term because of the pandemic, a lot of the hospitals are virtually shut down for anything other than caring for patients in the pandemic. So we've seen a short-term challenge on demand in that sector. So those would be the 2 biggest business units.

[Operator]

The next question is from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, Research Analyst]

Strong execution on margins and cash given the environment. The first question I had was on the outlook. Given what you've seen so far and the deal wins, how should we think about the rest of the year? I think C.P. commented earlier, I think in the prepared remarks, that you think probably the worst is behind. So from a shape of revenue for the rest of the year perspective, if you could just elaborate on how you think the rest of the year progresses? And as you address that, could you also add about how should we think about the conversion of previously won large deals and also any remnant drags from supply issues in BPO and networks?

[Manoj Bhat, Chief Financial Officer]

So Ankur, I'll pick up from where C.P. left in terms of quarter 1. If I look at -- obviously, we believe it's the worst quarter [indiscernible] where in terms of, first, margins, I think we do expect that margins will go up from here. I think balancing it out is, of course, multiple pulls and pressures. But on -- considering all of that, I think we are very focused that, for the full year, we would try and improve margins from here almost on a continuous basis is what we feel. The second question on revenues. As Jagdish and Manish mentioned, the funnel is higher. Obviously, we are still seeing some slowdown in decision making. But we'll get a much better picture going forward. But even as I see more short-term-ish, I think we do see that we will see some revenue growth momentum come back in. And all my views are based on the situation I'm reading today. So from that perspective, I think our goal would be to try and see how do we achieve both revenue growth and margin growth from here. I think to your question around supply side, today, if I look at it, I would say most of the supply side constraints are out of the way. So if you look at this quarter, we started the quarter with -- in some of the service lines with a very low ability to serve because of certain customer constraints as well as certain internal constraints. And through the quarter, we have built up our ability to serve and some of these supply side issues have gone away. So to me, as I see that normalizing going into Q2 also. So I don't think that is going to be a constraint in terms of our ability to deliver. So that's the way we see the year. I don't have a specific number for you. But that's where we are today, and we do believe that this was the worst quarter for us. And it is -- from here, we will look to improve.

[Ankur Rudra, Research Analyst]

That's helpful. I've got a couple of questions on comms after this. I know comms has been impacted by the networks business that has been a bit more volatile. How should we think about the underlying trend outside of networks because one would have expected a bit more resilience from comms? That's one. Secondly, there's been some geopolitical restrictions on Huawei in the U.K. and perhaps in other markets in Europe. How should we think about the impact of that on your business?

[Manoj Bhat, Chief Financial Officer]

And I'll request Manish to address both of these. Manish?

[Manish Vyas]

Sure, sure. Ankur, thank you for the question. I think the quarter 1, we saw the impact due to the inability, thanks to COVID-19 restrictions, for the network field teams, particularly in markets where we were gaining traction the last 2 quarters or so. That got impeded. Like Manoj said, a lot of that is now removed or almost it is removed. We also -- like Ritesh said, we had substantial issues in the first part of the quarter on the supply side because of the work from home not getting enabled, that some of the customers have delayed enablement. And as you also know, in quarter 1, typically, we do have a seasonality impact at one of our portfolio businesses. So that also played out. Unfortunately, all 3 factors [indiscernible]. We believe that we still continue for growth in this business outside of that. And I think as all of these 3 correct, I also share the same view that, if nothing else happens, I think we should be looking for better numbers going forward. So I think overall, given the current funnel and the correction on these 2 or 3 areas of businesses typically, one had a seasonality impact and the other where we've had the supply side issues, I think we should continue to look better, Ankur.

[Ankur Rudra, Research Analyst]

Manish, your second question was on any thoughts on Huawei?

[Manish Vyas]

Yes, I'm sorry. I think -- I mean, that story has been playing out, and it is getting even more acute a problem statement. So as we've seen, many operators are thinking the next steps, and they are really dealing with 2 problems and 2 question statements. One, what do they do with their installed base, not in terms of rip and replace but in terms of how do they support. And two, what do they do with the new stack, particularly, let's say, Europe has the 5G stacks come to the industry. We are expecting a lot of activity in that space. To C.P.'s point earlier, we have always built a strategy that supports 2 or 3 key principles, disaggregation of network, software-based networks, and of course, disrupting the supply chain. I think these things do play out well for a system integrator like us. And we are already in discussions, in some cases, early, but there clearly are discussions to start reimagining the network publication architecture on the principles that we have been talking and propagating for the last several days, months and quarters. So I think that's purely to both geopolitical as well as the new stack need in terms of a new architecture for building the ability, flexibility, the speed. Because as you know, 5G products and services that the operators will offer are going to be dramatically different than what we saw in the 4G era. Keeping these 2 things in mind, I think there will be a lot of action. Some people will benefit who are incumbents that are not necessarily from China. But at the same time, with the success of Rakuten, as the network has gone live and is now supporting more than 1 million subscribers, it is very clear that there is a lot more interest in the disaggregated software-based cloud-native network, which your company has always said that is the way to go, if you have to become a more restrained type industry, so that we could drive faster changes with the product and services, unlike what has happened in the past. So good area to watch for together also, and I should assure you that we are very focused on that already.

[Operator]

The next question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

Congrats on the good execution during the quarter. And also thanks for the item disclosure statement results. My question is on, I think C.P.'s earlier comments on working on the margin improvement and he also spoke about Manoj and team putting together a certain set of activities to kind of ensure that. Could you kind of detail that out for us a little bit, please, specifically what's being done that's different from what we've done in the past? And a related question to that is that will these activities or set of activities ensure that the margin volatility that we've seen in the last several years kind of then goes away and we see more stability in operating margin?

[Manoj Bhat, Chief Financial Officer]

See Diviya, let me try and articulate what we have done on margins. So if I look at 2, 3 big buckets. So one is, of course, more from a perspective of almost zero-based approach to cost. So we have looked at all of the line items and looked at what is discretionary, what is non-discretionary and arrived at a new normal, which is more a thing around increased scrutiny, increased control. The second area is, of course, around making sure that there are some natural levers like reduced travel, et cetera, which have helped in this quarter. But as we think about a broader approach to the model on delivery, I think there's an element of work from home, which will come in. There is an element which will be linked to that, which is about facility cost savings. There's an element of certain costs around travel, et cetera, which will not be required in some of these models. So all of those will start coming together into the future. The other area we are working on is really looking at increased automation in some of the service lines, which is a big driver for future efficiencies is what we believe. The touch -- touching upon that, which is kind of linked to the whole approach around combined delivery is, I think you saw the offshore revenue move a bit towards -- from on-site to offshore. That is an initiative we will pursue going into the year. So these are probably a longer-term set of initiatives. The second bucket I want to focus on was what we said always about some of the large deals and how we have invested last year. And clearly, I think as these go -- and both of those larger megadeals are going on track. And I think we should start to see some of those benefits come through in the next 2 or 3 quarters as these things go into a higher gear in terms of the execution plans on making sure that the expected return on these deals start to come through from -- and moves from an investment phase to a return phase. So that's the second big block around margins. And the third one, which I think is the portfolio company synergies. And I did talk about an integrated approach to both front-end synergies as well as overall back-end synergies, and that should start contributing. The other topic, which I want to talk about is, as part of this, there might be certain restructuring-oriented costs on the portfolio companies, which we'll have to take those costs as we come by it. So this is the -- these are the 2 or 3 main levers. The other area where we are focusing very hard, and C.P. did allude to data analytics, is around service lines and countries and pruning our presence may be required in some areas where the yield does not meet some of the objectives. And that's one more area we are looking into deeper detail. So combining all of this, I think there's going to be margin levers which are more structural. From a volatility perspective, I cannot say did -- if we do get another megadeal, I cannot say today that we might not see some swings. But those are some necessary investments we are making. But outside of those, I would expect that with all of these measures consistently working, we should have some measure of stability around the margin trajectory.

[Diviya Nagarajan, Executive Director and Research Analyst]

Perfect. And just a follow-up to the 5G discussions that we were having earlier. I think you were earlier talking about the time line of end of fiscal '21 by when we were expected to see some 5G-related spend conclude for you. Does that still hold? Or does it get pushed out into fiscal '22 because of the current situation?

[Manoj Bhat, Chief Financial Officer]

So earlier, it was far earlier because I think we had already said that maybe this is not going to be a FY '21 phenomenon. But it looks like it might get pushed into the next year is what we've already said. And that -- was that the only clarification you needed? Otherwise, I can ask Manish or someone to settle?

[Diviya Nagarajan, Executive Director and Research Analyst]

Yes. And if you can give us some indicative time line of when you actually expect, if this is going to be early fiscal '22 or if it's going to be late fiscal '22, some idea?

[Manoj Bhat, Chief Financial Officer]

Manish, you want to expand on 5G, what is your sense? What are you seeing in...

[Manish Vyas]

Yes, Manoj. So I think we have -- thank you for the question. We believe that the 5G for -- and I think C.P. articulated quite nicely in terms of how we look at the 5G world in all 3 spectrums. The 5G for service providers at both a network level as well as the system changes, that is clearly pushed out by 5 to 7 months. So sometime early next year, we will continue to see a greater velocity on that as the decision happens, particularly in markets where we still have not had the spectrum allocation and the delays are seen there, in Europe, for example. You've also seen some discussions now started in India and other places. As far as the enterprise is concerned, some great interest. So some of the early use cases are not likely to be 5G dependent. They are likely to be "international network enabled" use cases. So that probably, those are maybe a few more months behind the network build-out. So we're talking sometime early next year when we will see a little bit more momentum as across the board people will start spending. But also I hope you recall that we've always said that the pattern in which people are going about the 5G enhancement and deployment is going to be not necessarily all in a one big bag. Every operator is going to start driving different methods of conducting 5G. So that's why you will also see this not coming in as a big one spurt, you are going to be seeing this as a gradual increase in improvement across different parts of the world, different operators and different areas of the network. So we probably will pass these a little bit of digital core. There is an increased discussion around open brand now. But these are very early discussions because people have gotten excited about some early success with smaller operators, but these are big capital investment decisions. And specifically, as you know, better than most, the service providers take a very, very cautious measure with technology changes to their core networks. So I can talk sometime early next year.

[Operator]

The next question is from the line of Rishi Jhunjhunwala from IIFL.

[Rishi Jhunjhunwala, Research Analyst]

Just one question on deals, right, and the ramp-up. So clearly, we had a phenomenal year last time around. Just wanted to understand do we have all those deals ramped up already? Or were there delays which could possibly come in future and, as a result, support revenues? The reason why I'm asking is, is that, basically, do we need to rely on the deal intensity to pick up to see sequential growth for the rest of the year?

[Manoj Bhat, Chief Financial Officer]

So Rishi, I think from those deals, I would say that at least on the communication deal, phase I of the ramp-up was done. And I did mention that this is a deal which will be a layered kind of deal, and we will win some more incremental. The timing of that could be a bit uncertain, but that's the deal structure. And the second one, I think it is almost that particular piece of work has been fully ramped up as we speak in Q1. And from now on, it's about -- we have entered a new customer through a large engagement and how successfully we are able to leverage that entry, that's the kind of profile we can see there. So does that answer your question, Rishi?

[Rishi Jhunjhunwala, Research Analyst]

Yes. And secondly, just on the margins, if you can just repeat the margin walk for the quarter?

[Manoj Bhat, Chief Financial Officer]

Margin walk for the quarter. Rishi, I can send it to you offline. Is that good?

[Rishi Jhunjhunwala, Research Analyst]

That's fine.

[Operator]

The next question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, Research Analyst]

So 2 questions. First, on the pricing. Manoj, any view how the pricing discussions have been? And when we are talking about deal discussions getting elongated, any sense in terms of is it around pricing or the commercials of the deal terms? That's my first question.

[Manoj Bhat, Chief Financial Officer]

So from an elongation perspective, it's not so much about commercials or pricing. It is about that how do people take decisions more effectively in a different environment. And that's what I think even C.P. alluded to that, that's also something which people are learning, and I think Manish also spoke about kind of the same thing. So I think we should see that normalize over a period of time. And just a basic question around pricing, so to me, I think, obviously, it is limited to certain sectors, which is about how do we reduce total cost of ownership, how do we make sure that there is right focus in terms of dollars going to the right service lines and right businesses within the customer. And those discussions are more holistic in nature. It is about a combination of deliverables in the contract, location of delivery as well as, obviously, reducing total cost of ownership. So those actually have been fairly limited, and I don't think we have seen a material impact, and we don't anticipate, as of now, a material impact because of that. But again, this is a dynamic thing. So as and when we see that, we will probably raise it. To me that -- the current view which we have taken is, of course, that in all of these, we are supporting the customer, is finding a better way to drive same outcome or more outcome for lesser dollars using a combination of these measures. And the second feature, which I've spoken about is many of these are even then short-term in nature and they are not long-term in nature. So that's the 2 things I can mention about pricing.

[Pankaj Kapoor, Research Analyst]

Understood. That's useful. And my second question is on the working capital side. So going into the quarter, there was a fear that the DSOs might go up, but obviously, you have been able to control them fairly well. Given the cost control measures and the internal focus which has now come in on the operational side, do you think that these levels can be held going forward as well? Or you think that there could be some deterioration in the DSOs as the revenue growth comes back?

[Manoj Bhat, Chief Financial Officer]

So I think DSO, for example, I did say that this quarter has been a bit unusual because we have actually gone back to customers, and some of them have acceded to requests, even paying some invoices, which were not due. To that extent, there might be a small adjustment. But otherwise, my view would be that, I think as we go through the next phase, I think we've probably gone through the worst quarter in terms of customers coming back on that front. And so I would like to believe that we would be able to maintain it here, obviously, adjusting for that element I spoke about in terms of some of the advances and some of the early collection we have done. But that's the way I would look at DSO for the year.

[Operator]

The next question is from the line of Sumeet Jain from Goldman Sachs.

[Sumeet Jain, Equity Analyst]

Congrats on good execution on the cost side, particularly. So Manoj, a couple of questions for you. I think, firstly, in the prepared remarks, you mentioned that 7% decline was due to COVID this quarter. Out of it, 1/4 was supply led. But I'm assuming against that supply constraint, you had a demand to fulfill. So would it be fair to assume that now the supply constraints are behind us and the demand is still there, so in BPO and network, we should actually see a sequential recovery as far as supply is concerned.

[Manoj Bhat, Chief Financial Officer]

I would build that into the base case because it's also a law of averages kind of thing, right? So I think that will also help going into Q2.

[Sumeet Jain, Equity Analyst]

Got it. Got it. And secondly, I think in your expense structure, I can see the subcontracting expenses have gone up on a sequential basis, even in absolute terms, while we have generally seen this quarter that subcontracting expenses have gone down for almost every one of your peers. So can you just a bit comment on that front, why there was increase? And secondly, whenever we execute on any large deal, typically the subcontracting expenses go up. So how are we trying to delay that margin deterioration in the long run?

[Manoj Bhat, Chief Financial Officer]

So that increase is largely because we assimilated those 2 numbers, right, from Zen3 and Cerium into our books during the quarter. So all of that increase -- a large portion of that increase is there. But -- so from a material perspective, it is flat. It has not reduced. But that's where I said that, that's another area we are focusing on hard going into future quarters.

[Sumeet Jain, Equity Analyst]

Right. And secondly, the follow-up in terms of executing any large deal in future, like, to mitigate increasing subcontracting expense, how are you trying to mitigate that?

[Manoj Bhat, Chief Financial Officer]

I think it all depends on the deal structure, right? So I think it's -- for example, one of the deals we took ownership on day 1 -- and in fact, on both the deals. So obviously, in that kind of a structure, you will see a sharp ramp up and ramp down essentially of costs as and when we take ownership of delivery on our own, right? So I don't know whether that was the question, but it depends on the deal structure. In some cases, we might not have. In some cases, we might have. It all depends on what is the kind of ownership we take day 1 and what is the current construct of the delivery model of the client.

[Sumeet Jain, Equity Analyst]

Got it. Got it, Manoj. And one question for Manish on the telecom side. I think, generally, we have seen a lot of resilience in the telecom CapEx spending or even the spending on the network side. Now given that this quarter, obviously, we had much more supply constraints and the business seasonality, so Manish, how are you looking at the revival in the telecom business in the remaining 9 months, given the supply constraints would be likely behind us?

[Manish Vyas]

Yes. I think, like I said, hopeful and optimistic that we should continue the revival and the growth based on the factors that impacted our Q1 numbers and based on the discussions that are underway right now. We do believe -- and of course, given the deals that we have as they continue to execute well. So I do agree that we should across the range -- across the region and across the range of offerings, we are seeing significant dialogue interaction in terms of the opportunity. We still have to watch for the fact that there is a big, large part of the telco business that has got impacted very negatively, which is their enterprise. Because the enterprises have found a way to -- and not all of them, but most enterprise sectors have found a way to continue their business. However, from a network infrastructure standpoint, that need has significantly shifted, right? The traffic is not going back to the content business districts very quickly. So how much of that will be an impact and what will be the steps that we will take to -- both on the cost as well as technology, capital outlook remains to be seen. Almost everyone has been right now giving a very broad commentary with their commitment towards network spend. However, the specifics of that is still playing out. So we have to watch. There are still some uncertainties and an area to watch for. But overall, as a broad general commentary, I do believe that we should -- that the worst is behind us in the quarter 1.

[Operator]

Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Manoj Bhat for closing comments.

[Manoj Bhat, Chief Financial Officer]

Thank you all for joining the call. If there are any unanswered questions, please do reach out to Kaustubh or me, and we'll be happy to answer your questions. Thank you.

[Operator]

Thank you. On behalf of Tech Mahindra Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.