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Tech Mahindra Ltd
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Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q1 FY '23 Earnings Conference Call.
[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.
Good morning, good evening. Thank you for joining me on the Q1 FY '23 Analyst Earnings Call. Again, welcome. And I do pray for your good health. Overall, as you know, Tech Mahindra is a company driven by purpose and its people-centric and performance driven. On the purpose side, Tech Mahindra continues to be recognized for their focus on ESG and focus on sustainability.
We have been rewarded, awarded, and more or less continue to set the benchmarks and sustainability. On the people-centric side, our Chief People Officer, is one of the proud recipients of the golden pick of HR excellence. We have also been recognized as the most preferred workplace at the India Today Summit. I'm just briefly covering what has happened during the quarter, and we have also improved the gender diversity from 34.1% to 34.4%.
In terms of performance, I would like to reiterate that the big bold steps that we took in developing some of the capabilities, 5G, Meta Village, the Makers Lab that we set up at 8 different locations, continuing to invest in data and AI Labs continuing to invest in sports stack vertical with platforms like next now -- Fan Nxt.Now, new platforms like netOps.ai. I think is all coming together, and we are able to deliver sustainable growth, and we are able to create value for our customers and partners. I know Rohit will cover the performance results in a greater detail.
On the growth side, we are now in constant currency at $1,632 million. Comms has grown 3.9%. And Enterprise has grown at 3.2% in constant currency. I also have an honor of welcoming 2 new verticals into billion-plus clubs. I mean Comms has been there for a very long time. But the new $1 billion club now has BFSI and Manufacturing for Tech Mahindra.
The company continues to be driven by new age technologies, digital transformation and more importantly, business transformation. Our EBIT margins have been a little bit under pressure. But as a company, we are determined to reverse the trend. And what I've committed to my Board is this is the lowest we have gone, or we will go. And we will be working together with my transformation office and my leadership to look at many operating levers, particularly on utilization, particularly on efficiency and productivity and the pricing level.
So again, Rohit will cover this, but I just want all of us to recognize that building technology at scale, building 2 tier cities, delivery centers and preparing for the future. Yes, there has been -- the reported EBITDA margins have been lesser than what we had originally probably projected.
In terms of pipelines, I think both the sectors are showing a very healthy pipelines. We track our pipeline for existing accounts, new accounts. We look at digital transformation. We look at the business transformation. We also very actively monitor our deal conversions. As I had indicated earlier also, that the focus is to deliver between $700 million to $1 billion of the conversions every quarter. This quarter also, we would be sharing with you that we have booked about $800 million. So clearly firing on all cylinders.
I know that there are 2 internal focus areas: number one is organic growth; and number 2 is to bring back profitability on the track. I'm confident that these 2 focus areas, coupled with the growth -- industry-leading growth, I think you would find us much better aligned and much better prepared. In terms of the economic challenges, as of date, we see the deal flows to be strong. We do analyze every account, every sector about the potential.
So we have a dedicated task force, which is not only looking at geographies, but also looking at the various verticals and what our response would be. So I can only say that as of date, while there may not be a general consensus on when the headwinds -- the economic headwinds will start pinching us. But overall, I think we are in good shape for the next few quarters.
So that's really the opening commentary for all those people who are chess lovers. I can only say that Tech Mahindra is very proud that we have been chosen by the International Chess Federation to be the digital partner for its 44th FIDE Chess Olympics. And it's the first time it was taking place in India. It starts on 28th in Chennai. Those who would like to join us -- and on the ring side of the chess olympiad. I mean you're all welcome.
So again, thank you for your support, and thank you for your confidence. I'm handing over the call to Rohit to get an update on financials.
Thank you, C. P. Good evening, everyone. Let me now cover the company financials for Q1 ending June 2022. We ended the first quarter with revenue of $1,632 million versus $1,608 million last quarter, up 3.5% Q-o-Q in constant currency. Growth was broad-based, as C.P. mentioned, with CME growing 3.9%, Enterprise going 3.2%, both in constant currency terms. We had another quarter of strong deal wins with our TCV at $802 million. Revenue in INR terms was INR 12,708 crores versus INR 12,116 crores in Q4, up 4.9% quarter-over-quarter.
The EBIT for the quarter was at USD 177 million, in INR terms INR 1,403 crores versus USD 211 million in Q4. EBIT margin for the quarter was at 11%, which is a reduction of 220 basis points Q-o-Q due to higher salaries, sub-con related costs and some large deal transition costs that we saw. Another reason for reduction was revenue and visa seasonality that we see. And then normalization of G&A and sales cost was another reason of margin reduction, offset it partially by pricing benefit that we saw.
Moving below EBIT. Other income for the quarter was at $16 million versus $42 million in Q4. ForEx was at $7 million compared to $28 million in Q4 2022. The tax rate for the quarter was at 22.8%, which is higher compared to 17.5% in Q4. This is because we had higher reversals of tax provision related to FTC benefit in Q4, and partially also in Q1. Our normalized rate is in the range of 26% to 27%.
The net profit margin for the quarter is at 8.9%. Our free cash flow for Q1 FY '23 was $72 million. Our DSO increased by 3 days to 100 from 97 in Q4, partially impacted by currency because of debtor revaluation. As mentioned earlier, we will continue to consistently follow a role-based hedging policy.
As of June 2022, the total hedge book was $2.28 billion versus $2.2 billion in Q4 '22. Based on hedge accounting treatment, the net mark-to-market gain as of 30th June was $68 million, out of which $11 million is taken to P&L and $57 million is gone to reserves. We had a cash and cash equivalent of $1.114 million, INR 8,801 crores. Overall, the demand momentum, as C.P. mentioned, continues driving growth while the supply side pressures are impacting profitability. But we committed towards improving our profitability with targeted actions that should help us tide over the short-term pressure.
With these remarks, I now open the floor to questions. Thank you.
[Operator Instructions]
The first question is from the line of Sandip Agarwal from Edelweiss.
[Operator Instructions]
As there is no response from the current participant, we'll move on to the next question from the line of Ravi Menon from Macquarie.
Rohit, I just wanted to check if there is any one-off in C&A like a bad debt proton or something like that? It seems to be up very sharply quarter-on-quarter.
Yes. So last quarter, we did have some gain, which was onetime. And this time, we've had increase in provisions because of which the quarter-over-quarter variation is looking large.
Right. [indiscernible] the provisions this quarter, please?
We had the provisions, the range of around $6 million, yes.
And when you look at -- would be great if you could share your vertical breakup in quarter-on-quarter in constant currency growth because of the cross-currency movements being shopped. This is not -- it's a bit difficult for us to figure out what's happened to the communications vertical for instance.
Yes. So from a growth perspective, I can go one-by-one. On a constant currency sequential quarterly, as I mentioned, Comms was 3.9%. When you look at Manufacturing, that has grown 5.7%. Technology has grown 6.4%. Retail have grown 6.8%. HLS and others have grown 2%. And then the BFSI will be mostly flat while on the reported side, it's impacted most because of FX.
The next question is from the line of Gaurav Rateria from Morgan Stanley.
So firstly, on the large clients, if you look at the top line performance on a quarter-on-quarter basis, it looked like a bit of decline that could be an element of CapEx. But even if you step out that seems quite weak. So anything going out there, especially in the top pipeline bucket.
Yes. So mostly, it's FX that you see. And then there are certain projects that for the quarter stopped in the new projects are going to start in the following quarter. So beyond that, there's nothing. But if you look at the trend broader, I think we've expanded beyond that outside the top 20, the growth has been substantial. So that's a good sign, and that's where we've had historically certain deal wins also that are ramping up. So the base in the top customer is also spreading out.
Could you just talk about the puts and takes on margins? I guess there would be some impact of wage hikes, which may come in the coming quarters. So what would be the headwinds and what would be the tailwinds? What gives you confidence that this is a bottom for the margin and it will go back to the range you had historically talked about.
Yes. Sure. Sure. So from a Q2 perspective, headwinds predominantly is only 1 which you mentioned, which is going to be the wage hikes, right? From a tailwind perspective, we've had certain good outcomes from pricing. I think that we have a good funnel and visibility. So that will continue, giving us some tailwind in Q2. We also will have lesser impact due to the visa and MobiLytix business impact that we saw Q4 to Q1. So that will ease out a little bit. So that will give us a favorability.
The other big area, which C.P. also reiterated that we have a lot of focus on operational efficiency. There, we put plans to get our utilization back up. So if you remember, we've spoken a couple of quarters back, that we are consciously investing in the talent pool in investing in bottom the pyrite. That utilization trend, we have concrete plans to get up by delivery unit, by geography. In the current quarter, which will give us some positive tailwind as we look forward. Another big focus for us, we have almost 8% to 10% gap on our offshoring revenues versus peer set.
And there also, we have a clear -- by delivery unit and geo action to drive offshoring in the current quarter and as well these factors will continue through the year. So talk about Q2, and then some of this will continue through the year. So those are the big actions that we're going to drive from a tailwind perspective. And this quarter, we did have some large deal transmission costs, which I mentioned. Those won't be repeated. So as we see that, that will also give us a benefit in Q2.
Lastly, on the cash flow, the conversion of PAT into free cash flow for the last 2 consecutive quarters has been weaker than your usual trend. So what are the factors that have driven that? And how long will it take to come back to the historical trend that you had to -- that you used to deliver?
Sure. I think this time, a bit of the play was also driven by FX. But irrespective, I think operating performance will be better as we look at Q2, Q3. So between the next 2 quarters, I think we will get a similar FCF conversion rate that we've seen in the past closer to the range of 90% to 110%.
The next question is from the line of Dipesh Mehta from Emkay Global.
Two questions. First about the -- can you help us with the margin in Q1? I think you indicated some of the factors. If you can break up the entries those factors?
Second question is about the margin trajectory. I think we are suggesting good confidence about margin recovery. But considering, let's say, sometime that we use to indicate 14%, 15% of EBIT margin is a good range, considering overall business mix and the future potentially, maybe we can increase it to further over medium to long term. So by when do you expect it to be -- we can again get to our optimal range of margin projection.
So specifically for current quarter versus last quarter, as I mentioned, we saw approximately a 50 bps expansion due to pricing actions, and we've been talking about it for the last -- previous and the previous quarter that we're working at it. So that's giving us the positive outcomes.
We've seen salaries, sub-con and large deals, those 3 combined contributor headwind of approximately 100 bps in the current quarter versus last quarter. These are seasonality in the MobiLytix business jointly contribute approximately 80 bps. So those were the 3 big factors on the direct side, and then there is a percent impact on G&A normalization. We had some impact in the last quarter, which is getting normalized, and some of the impact on provision also that we had due to which we are at 1%, 100 bps negative impact versus last quarter on the G&A part. So those are the big drivers that lead to a 13.2% to 11% book.
Then second part of your question, I think as we look forward, a lot of these actions that I articulated are in motion. We have a very detailed micro plan that we're working on. And that gives us the confidence as we move forward that every quarter sequentially -- given this as a bottom, we will increase margin anywhere between 100 to 150 basis points. And by the end of the year, I think we'll be in the range of around 14% EBIT. I think I mentioned earlier, 15%, but I know where we are right now, 14% seems like a more 4Q exit run rate rather than 15%.
[Technical Difficulty]
Sir, 1 moment please.
Is there any next question?
Mr. Agarwal? Mr. Sandip Agarwal from Edelweiss...
Sorry, I was on mute. C.P. thanks for the update on the business side and also good execution on revenue path. C.P., what are you seeing in the market today?
Are you seeing increasing sales of the clients towards conservatism given the macro situation, macro environment? And -- or you are seeing the continued spend or the inclination to spend money? What is that you are seeing in the market today versus you were saying 6 months earlier? So how has the client mood changed? Are you seeing any kind of change in the client perspective mood? Or they have really done some action on that like they have taken some things, longer time or delay, any kind of retrenchment from the aggression by which they were spending earlier. Are you seeing any kind of early signs of that?
Yes. Sandip, thanks for the question. This is Rohit. I want Manish and Jagdish to comment about Comms and Enterprise verticals. And then I'd like to also summarize it corporate level, how are we tracking in terms of what changes are we seeing? So Manish, first probably to you.
Sure, sure, Joe. Thank you. And Sandeep, thank you for the question. I think clearly, there is a lot happening in the macro geopolitical economic scenario. And hence, the question is quite valid. There are clear discussions in the various customer environments, about what is exactly in store. So that indeed is happening. Is that resulting in any specific macro level trend change in terms of the spend patterns? We haven't seen any evidence of that yet. There are a one-off conversation that happens, but that is very strictly limited to that particular company's own individual decisions, which I think is nothing to do with the overall macro scenario.
At this point, I think like C.P. rightly -- and Rohit mentioned, right upfront, the funnel is pretty robust. The decision cycles continue to remain exactly as they were 6 to 7 months back. The areas where the discussions are happening in the telecom media space, continue to be in this case of what is called digital transformation, the holistic digital transformation from network modernization to driving more velocity on underlying digital platforms, whether it is cloud or data or customer experience. I guess that continues to happen. We haven't seen any -- net-net, in short, before I hand over to Jagdish, I would say at this point, we haven't seen anything material to come back and report at this.
No, I think, Sandeep -- thanks, Manish. The outlook, I think, for us hasn't changed. It's very positive from a deal win and the pipeline robustness perspective. I think we all have to recognize that in the last couple of years, a trend that has got started in terms of redefining or rather modernizing the core of everyone's enterprises business, what I do the enterprise is the organization's core platforms and solving that problem that we don't see any let down.
So the pipeline of what we've talked about approximately upwards of [indiscernible] -- you've heard $700 million, $800 million of TCVs. We see a similar trajectory every growth I personally drive the large deals across the company and therefore, that large deal momentum, I still see to continue. So from a deal win perspective, I don't think there is any let down.
Industry-wise, all of them, as Manish said, are focused on digital transformation, so supply chain issues. And we called out 4 key areas, right? Cloud, connectivity, engineering and experience. And all those 4 key areas, we think that even if there is an economic slowdown, the investment on those areas is something that the companies and enterprises will have to do if they have to be relevant. And so therefore, that part we feel very confident about. I hope that answers your question, Sandeep.
The next question is from the line of Dipesh Mehta from Emkay Global.
My question has been answered.
The next question is from the line of Sandeep Shah from Equirus Securities.
This question is to Manish Vyas. Just looking at the macro recaps, which are been increasing, what we have read -- what we are reading is on the 5G CapEx, clients are maybe becoming slightly cautious. We are accelerating where they can find the paid consumers. But where they are not finding the paid consumers, they may become slightly more consented. So whether this trend can lead to any negative surprise in a telecom growth recovery, which we have seen for almost 4 to 5 quarters. Do you foresee any downside risk to the growth movement on the telecom going forward?
Sandeep, again, thank you. I see it like this, the 5G spend in the markets that we're spending was not necessarily a function of added consumer revenue. The focus on 5G was always to continue to build the new modern network in terms of replacing what is called the carrier ads, the capacity build. So instead of building the carrier ad on 4G, it was happening on 5G, and that trend will continue. The revenue uptick for the telcos was always going to be more around enterprises, not as much about the consumer business. I mean that's a normal cycle that will continue. So that's not really necessarily a driver in anything changing.
As far as the sector performance is concerned, I'm assuming you're referring to our performance versus the industry broad-based performance. I don't think, like I said earlier, that whatever is happening at a macro level is giving us any indication of a slowdown in the kind of opportunities that we are engaged in, in driving transformation at a process, at an operate, at a system and at a business design level or customer experience level, and for that matter, at the network level. We are not seeing any change to the pattern of the kind of funnel that we are building.
Just a follow-up to C.P.' opening remarks where he said we are confident for the growth in the coming few quarters, while some of your large peers are indicating a macro may start impacting the second half of the growth. While I'm expecting that Tech Mahindra even the second half of this , we may see a healthy growth. So what is driving this confidence as a whole?
Yes. So Sandeep, I think a few things. One is we are continuously monitoring the pipeline. And the pipeline looking pretty strong, maybe better than what we've seen in the past. Now the questions of deal conversion. So if the trend continues, what we've seen in the last 3, 4 quarters of the range wherein that continues over the next quarter or so, a couple of quarters, I think we should be in that zone of continued demand environment, right, which is what we're seeing right now.
Of course, it's a very dynamic world. So hence, we are monitoring the situation through constant data as well as client interactions and continue to put that feedback back into the way we're looking at the next half. So that's kind of where we're doing it. But I think qualitatively, as Manish, Jagdish mentioned, there's from a client communication discussion perspective, there's not some significant change as they move into the second half that we've seen and that's why that's reflecting in our data, and that's the view we right now. I'll also like -- we wait to add his view on BFSI that he's seeing or HLS that he's seeing that from a discussion with this client that he can share with the crew.
Thanks, Rohit. So not to repeat what Manish, Jagdish and Rohit have said, but just reiterate that we haven't seen any budget reductions. I think what gives us a degree of confidence is the pipeline. I think we've had a continuous win of large deals. So I think we have a backlog to execute on. I think that does put us on a reasonably good footing as we look forward for the rest of this year. And lastly, I think not only from the big ticket macroeconomic indicators, which has everybody confused. I don't think anybody has an answer. But what we are focused on is more specifically looking at different industry sub-verticals and the impact they may have. And they're obviously at the next level, which are our specific clients of any specific impacts they would have. And what we have is a fairly laid out thought process on how we would react if we were to see any early signs.
Okay. Okay. And last one, if I can squeeze just on your margins. So in terms of your comment, how much dependence are we placing in terms of pricing as a team in terms of your commentary of targeting 100 to 150 bps Q-o-Q increase in the next 3 quarters. And just a follow-up on the wage hikes. How should -- so what percentage of employees being covered in the first quarter? Is it effective in April? And what percentage is spending, and how the balance results are scheduled?
Yes. So Sandeep, on the pricing, maybe we stick to our pricing first. So we've sequentially quarter-over-quarter seen increasing the quantum of price increase we've got. This time impact, as I mentioned, was 50 bps. What we look at next quarter is similar or better outcome of that. But outside of that, in the second half right now, while we'll continue to drive it, I think the view is it's mostly first half factor as an upside for us. We've not baked in significant upside in the second half, right? So that's pretty much on the pricing side.
In terms of wage hikes, it's all from a company perspective, I'll we do constant interventions through the year because it's not the same world as it was a few years back. There's usually a lot of retention and the skills intellectual will happen through the year. But from an annual cycle perspective, that for us will be effective Q2. And broadly, the impact there is going to be around 100 bps.
And after 2Q, all 100% of the employees would be covered on an annual basis?
Yes. That's right.
The next question is from the line of Ashwin Mehta from AMBIT Capital.
Just 1 clarification in terms of what you said, the 100 to 150 bps improvement starts from 2Q or it's more in the second half of the year?
Yes. It starts from 2Q, and it continues through 3Q, 4Q. That's how our actions are taxed. As I mentioned, right, from a Q1 to Q2 perspective, some of the impact that we've seen negative will get normalized as we move forward. For example, the [indiscernible], the visa spend, a seasonality impact will lower down. Beyond that, the large deal one-off transition costs that I mentioned does not get repeated. So that will kind of offset a little bit of the wage pressure that we see. And outside of that, the operating actions on utilization increasing from 80% to 83% to the range we're comfortable with, which is 87%, 88% through the year, some of that benefit will come in Q2. Similarly offshoring, we have specific targets by month that we've be driving as we move forward. It will give us that range in each quarter as we move forward.
And Rohit, in terms of subcontracting -- because that saw a further increase to in excess of 16%. What is the outlook there? Are we looking at that also being a lever as you go through the year?
It is. It is a lever. We are kind of -- while we're pushing that, but that is also a little bit of a cost that is in terms of stickiness available for us to act easier if we get demand slow down in the second half. And that scenario comes, right? What you've been hearing from others. While we don't see it, but there's so much of confusion what people are saying what the outcomes are reflecting. So when you look at us entering the second half, this is a relatively easier bucket for us to act on, right, and reduce as we move forward.
So as we look at it right now, if it's a sub-con reduction initiative, where we get some benefit to that and optimization. We're looking at 1:1 replacement from a headcount perspective more as we move forward for the second half rather than immediate actions.
The next question is from the line of Viraj from SiMPL.
Most of my questions have been answered. I just have one question now. I don't know Mr. Gurnani is on the call. It is regarding the investment approach is of acquisitions and investments, which we have been making for the last several years. And in '22, we made a significant amount of investment. And if I were to look at the impairment part, we took something like [ INR 450 crores -- INR 460-odd crores ] of impairment. And cumulatively, last 4 years alone, it's in excess of INR 1100 crores, INR 1200 crores. So just trying to understand how should one really understand the benefits of the acquisitions or the investments we've been making because the amount of the impairment is also quite sizable. So I just want to understand -- if you can provide some perspective.
Yes. So Viraj, maybe I'll just add a few sentences and then Vivek, who heads our corporate business development function will add on. So a couple of things. One is, from an impairment perspective, we've got to look at it at a consolidated level, what's the impact versus stand-alone, the numbers you're looking at more in subsidiaries and stand-alone numbers.
The way it happens is if we get an acquisition asset, the idea for us and the approach from an M&A perspective has changed versus what we had 4 to 5 years back, where now we are integrating the companies and the offerings solutions into our core business. So hence, when we look at any acquired company, the way we look at it is more like a measurement unit across legal entities, hence the business that happens to that offering grows in that stream, which is not reflected in the legal entity. And hence, at a legal entity level, you might see an impairment but a consolidated level, that's not the case, right? So that's kind of broadly the way it is, and that's why not to correlate that to the M&A execution strategy.
We continuously through regular discussions with the folks like you articulate our change in strategy, how they're performing, and we'll continue to do that as we move forward to show more and more transparency around our numbers on acquisition performance. But I'll want Vivek to add on some of the points around this.
Yes. Thanks, Rohit. So I think just from an M&A approach, both from a transaction perspective and integration and synergy, I think what we've said for the last couple of years is that our acquisitions are meant to be integrated into the core of the business. They have to become an integral part to a service offering of how we go to our clients. So more and more, our acquisitions are part of 1 TechM rather than looking at them as individual operating businesses, which we've acquired or invested in. I think the success in some part is reflected in our large deal wins over the last few quarters. I think you've seen a significant uptick and sustained momentum in our deal wins numbers over the last few quarters.
And one of the things I would attribute that to is our success in integrating a whole host of capabilities we've acquired over the last couple of years. And hence, we are more relevant to our customers' needs, and we can offer them a wider solution. I think that's 1 point. And I think in terms of -- a part of your question around our investment approach, I think we said this last quarter, and I just want to reiterate, I think the management team recognizes that we've had a busy M&A period over the last couple of years. So we will be very selective. Our focus is on integration on driving synergies in the short term out of what we've already acquired.
Okay. Just 2 parts. First is, it's more of a suggestion that we in the investor presentation, if you can kind of share over the last 2, 3 years or 5 years, the acquisitions we made, how will that kind of added in terms of increased deal wins or sale run rate or cost synergies because probably it's not coming out clearly to us as investors. So that's our suggestion. If one can just put some perspective there? -- for charts or some data points. Second is, if I look at this particular quarter -- so the CTC acquisition happened in Q4. And in the kind scale and the profitability that company made, we also kind of paid a good position point. But if 1 way to kind of better understand the organic versus inorganic growth rate, what would that be like for us in Q1?
And specifically on the margins -- because some of those acquisitions like CTC are very high-margin businesses. So if -- 1 way to kind of dissect tax on the numbers and just look at the organic business profitability. Is it right to think that the pressure in terms of profitability is even more severe than what we see on the reported numbers?
So I know there were a bunch of questions I'm trying -- I'll try and address one by one. And in case anything is left, please feel free to me. I think in terms of the information suggestion, currently, we share that at the Analyst Day event. So we're doing it once a year. But we will discuss it internally and see how practical it is to do it more frequently. But as we said last -- at the last year's Analyst Day event, we committed to giving the transparency once a year on overall performance, synergy, et cetera, of the acquired businesses and their integration status.
I think specifically to your question on CTC, it was nearly in the full quarter last year -- last quarter, sorry, because we did this middle of January. So I think it was 11 weeks for the last quarter also. And so it was largely like-for-like, especially when you consider the currency impact. As we all know, the euro, which is what is the accounting currency of that acquisition, has taken a massive hit against the U.S. dollar. But overall, I think the business remains on plan for -- it's early days, we recognize, but it is on track.
I think the only other item which relates to your question about margins on CT Co.. You may recall that, that business had a small setup in operations in Belarus. With the advent of the war in the region, some of our customers were uncomfortable with continuing to work in Belarus. So over the last few months, we have wound down our operations -- our customer operations specifically in the country. We managed to relocate most of our employees to other parts of Europe, if they were willing to. It has meant that we've incurred some onetime costs on that relocation. But it did not impact billing or revenue. And we do expect the newer operating model of a more distributed delivery across Europe to be sustainable going forward.
The next question is from the line of Ravi Menon from Macquarie.
Can I just follow up on [indiscernible]. I mean if you've seen the change to the demand environment. Why have we not really added tour freshers? What could be an important margin lever until it looks like we really don't have a fresh [indiscernible] at all because utilization including and excluding trainees at rate 3%.
Yes. So I think as I mentioned earlier, we have hired significant freshers last couple of quarters. And our endears to get them built, trained, deployed. I think that's been the internal focus. As we move forward, get more streamlined on that model as we move forward. We'll continue to add that sequentially over the next few quarters. So I think that is on the cards as we move forward.
The next question is from the line of Gaurav Rateria from Morgan Stanley.
So 2 questions. Firstly, the 2 large telcos that reported numbers in the U.S.. They lowered the margin and/or FCF guidance for the full year. So in this context, have you seen any prioritization of spending happening by them in terms of what projects are they prioritizing of others? And is there any assessment done internally of any particular projects that could potentially be [indiscernible] if such prioritization were to take place?
So as I mentioned, I think at a corporate level, while there are one-off discussions happening, nothing significant from a trend perspective to call out. But I still ask Manish, Jagdish and Vivek who handle different aspects of the business in the U.S. can command quickly on have they seen anything like that on a particular telco. So maybe Manish...
So I think Rohit, the question is more specific to a couple of telcos that have announced the results [indiscernible]. And the observation is correct and valid. And like I said, there are some conversations that are happening, very specific to a few project prioritization. But incidentally, all of them are around continuing to drive the digital transformation process a little harder and faster. Some work that will probably get shifted from moving work to a cloud to more driving a data intensity our customer experience transformation.
So that kind of reprioritization of some of that capital budgets may happen. And those are part and parcel of also what is -- what program is driving greater value than the others, and what may result in midterm to long-term benefits. I think it is in the realm of that kind of a conversation, not necessarily a reaction to a certain important performance. That -- there could be discussions around more a long-term impact, it's probably something which I don't think I can comment on it today because we haven't seen any such reaction from anyone at this point.
Second question is to hit amortization expense related to last few acquisitions have impacted margins in how should one think about the same going beyond F '23. Would that be a margin lever? And if yes, how big? Also, any lever on margin improvement from portfolio companies that can help you in the coming quarters?
Yes. So from an amortization perspective, year-on-year in FY '23 to '24, there will be very marginal change or significant benefit at the company level. But we will continue to see certain other management cost benefits as we move forward, which would help margins. And then maybe I'll ask Vivek to also add on some of the synergy actions that is driving that will also benefit. So Vivek, you can add as well.
So I think -- thanks, Rohit. So from a short-term impact, there are 2 items related to acquisition is which go through the P&L. Some of the earn-outs which are linked to continued association of the founders, they go through the P&L. And the amortization, as Rohit said, it's honestly fairly complex accounting of -- some impact is for 12 to 18 months on the amortization. Those will decline in the short term. But some of the amortization is 7 to 9 years linked to the acquisition. So we won't see a very significant change in that line item.
And I think the part around synergy, I think we've spoken about it before, but what we're really doing is very heavily focused on an integrated service offering, how do we take all our capabilities and offerings, both organic. And those who are acquisitions to our clients as 1 TechM offering. And I think that's yielding good success for us.
The next question is from the line of Vibhor Singhal from PhillipCapital.
So just one question from my side. Our margins -- again, on margins but not from some very near-term perspective. So my question was more like our margins have been quite volatile over the past few years. Of course, within multiple reasons, acquisitions and all. Last 1, 1.5 years, we had the benefit of a travel cost coming down because of COVID. At this time at this point of time, we are seeing all the supply-side pressures.
So just wanted to understand, let's say, 2 or 3 or 4 quarters down the line, when supposedly as all the other companies, and everybody has been calling out that the supply side pressures should stabilize, travel should also recover. What is the sustainable level of EBIT margins do you think that we can operate at? Keeping everything else constant, I know it didn't happen that way. But let's say, fewer hypothetically a view, that, okay, these things are stabilized. What is the kind of margin that we can sustainably report over a 2- to 3-year period of time, post these things set along?
Yes. So I spoke about this year walk, which is actions on our operating levers that we could be driving pricing, which is more tactical right now relevant right now, right? And then there are some structural actions that we're trying to drive, right, which are a little bit more medium term to long term. And we have got a specific project plan team working on those, on a specific basis, and we've aligned our measurement criteria targets also accordingly, right?
So if you think about it, what I'd spoken earlier, and which we're working on, a big part of our margin dilutions also, if you look at our geography mix, right? So when you look at our competitive U.S. European compared with some of the peers said, we are 10% to 15% lower, right, on that component. And the margin difference typically in that region versus the world is to the range of 10% differential, right?
So there if we get our mix in line with that comparison, we're talking about anywhere between a 1%, 1.5% increase over a longer-term cycle. That's something that will incrementally start playing out every quarter and every year as we move forward in that zone because it's not a shift that you can dramatically do in 1 year, right? So that's something that we will continue to drive on. And similarly, as vertical scale-ups are happening, BFSI is becoming more towards the $1 billion mark. Manufacturing is $1 billion. COGs already a big size of scale for us.
Similarly, Hi-Tech is growing. So there, you get operating leverage with the size and scale of that vertical that's something structurally that's going to help us. And then we spoke in the past, we're working also on very tactical area on pruning the portfolio, which is not core to our strategy, and we feel long term doesn't fit. So that -- those assets and identified portfolios are going to be taking a divestment actions on, which will improve the mix from a margin perspective, right?
So those are structural long-term actions, while we continue to drive tactically the operating levers each quarter. This will help us structurally change the nature of the margin profile.
So in terms of year-end, I think what we said in the 4Q exit will be closer to the 14% EBIT range. And then as we move forward, we'll continue to drive this action to continuously expand structurally, the margin level.
So is 14% the number that -- I mean, again, not a guidance for, say, for FY '23 or '24. But from a long-term perspective, is 14% EBIT margin number that we will be comfortable in with in terms of sustainability reporting that?
Yes. I think that's comfortable with a positive upside to that as we move forward.
The next question is from the line of Girish Pai from Nirmal Bang Securities.
First question is to Rohit, I recall you saying that pricing is not going to be so much of a dive in the second half of FY '23. So are you going to push back from some of the client conversations you're having on pricing? Because making you a little bit cautious on the pricing action side? That's question number one. Second question is to Manish Vyas. Where you talked about the reprioritization of certain clients digital transformation programs what exactly are these clients doing? I mean what are they deciding to drop now and try and shift that money to what kind of work. So those are 2 questions I have.
Yes. Sure. So I think from a pricing perspective, we started getting some benefit from Q4 incrementally in Q1, which we're outlying in the margin work. And then similarly, in Q2, we have a good pipeline of specific customer accounts that be very clear that the discussions are on a progressive stage of conclusion, right? So hence, that visibility towards Q2.
As we move about Q3, Q4, I think because these discussions have been on for a while, and it takes multiple iteration cycles to conclude. That's why this is more certain. As we move forward, maybe the quantum will reduce, and also a lot of discussions that you're hearing globally -- and specifically macro, does play a -- in terms of -- as we talk to the clients about second half. But as the scenario unfolds, right, from an opportunity standpoint, if this growth environment, everything, macro inflation, all that settles down, I think it will continue to be an opportunity for us in second half results.
But just saying we are factoring from the case that we're making from a margin perspective towards 2Q, 3Q, 4Q, we're not factoring price as a lever in 3Q, 4Q. If it happens, it will be an upside towards our margin profile. So that's the way we're looking at it. I'd like to forward it to Manish for the second part of the question that you have, Girish.
Thank you, Rohit. Girish, I just want to be very clear that, that question -- the answer was in response to only 1 or 2 customers and the perspective around it, not necessarily a macro industry-wide trend. So it's not going to be true for -- from region to region or from account to account. However, there are certain things which clearly at this point are gaining a lot more prominence in the conversations in terms of where the spends will happen.
Number one, there is an increased focus on automation, both from a network standpoint as well as at a broad-based operation to drive -- do a lot more with a lot less. I think it's something that clearly is a big focus. And that takes a significant investment at this point, and we are busy with both on the -- what we call as AI Ops as well as AI nOps, which is the network operations automation as well as the IT automation. So that's one.
Two, there is a lot of discussions around data centralization and driving data on cloud and integrating data with cloud. So that's also gaining a lot of prominence. Primary reason being that through that there is a monetization opportunity that the temps continue to see in the short term and the medium term as well.
The third clearly is there is going to be money spent around network modernization, and I will leave it at that at this point because it's a trend that will be evolving over the next 3 to 4 months, where we will start seeing a lot more spend happening in the fiber space besides, of course, the investments in 5G.
So I guess those are the -- some of the areas where you will see a little bit of activity.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Rohit Anand for closing comments.
Yes. Thanks. So I'd just like to reiterate and recap from a quarter perspective, demands looking strong, revenue growth of 3.5%, broad-based between Enterprise and Comms. We have 3 units now $1 billion run rate. From a deal win perspective, $800-plus million deal wins, which is in the range that we had articulated. Attrition has reduced quarter-over-quarter sequentially by close to 2%. Based on various interventions we took structurally over the last few quarters.
Margins down quarter-over-quarter by 220 bps, but that's a bottom point for us. We have actions that are planned as we move forward between Q2 to Q4 to get it up sequentially every quarter by 100, 150 bps. So the management team is committed to that. And from a capital allocation perspective, we'll continue to spend more time this year on M&A integration, on the acquisitions we have done, and focus on organic growth versus new acquisitions.
So that's a recap of where we are. And thanks, everybody, for joining the call today. Good evening.
Thank you. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.