Tech Mahindra Ltd

NSE:TECHM

Earnings Call Analysis

Tech Mahindra's Q1 Earnings Show Growth and Strategic Wins

Tech Mahindra reported Q1 FY '25 revenue of $1,559 million, a slight sequential growth of 0.7% but a year-on-year decline of 2.6%. The quarter saw substantial EBIT growth of 16.2% sequentially and 22% year-on-year, contributing to an 8.5% margin. Key wins included deals in the U.S. and U.K. for telecom and digital services, with a total contract value of $534 million. Free cash flow was strong at $106 million. Investments continued in AI capabilities and employee upskilling, laying a foundation for sustainable long-term growth. The company remains optimistic about achieving better results compared to the previous year.

Company Performance Highlights

Tech Mahindra reported Q1 FY '25 revenues of $1,559 million, marking a sequential growth of 0.7% but a year-on-year decline of 2.6%. On a constant currency basis, the sequential growth mirrored the reported figures, while the year-on-year decline was 1.2% .

Earnings and Margins

The company's EBIT reached $132 million, showing a sequential increase of 16.2% and a year-on-year rise of 22%. Consequently, the EBIT margin expanded to 8.5%, gaining 110 basis points quarter-on-quarter and 170 basis points year-on-year. After accounting for all expenses and taxes, the net profit stood at $102 million, reflecting a margin of 6.5% .

Vertical Segment Insights

Tech Mahindra experienced robust growth in the manufacturing (6.4% year-on-year) and healthcare (6.1% year-on-year) verticals. However, the communications vertical, particularly affected by the seasonality of Comviva’s revenues, showed weaker performance .

Geographical and Deal Wins

The company saw positive momentum in North America and targeted APAC markets. Deal wins for the quarter amounted to $534 million, representing a quarter-on-quarter increase of 6.8%. Key deals included partnerships with a leading U.S.-based Telco, a U.K. network service provider, a Japanese automotive manufacturer, and Sharecare for digital transformation and application development projects .

Strategic Initiatives and Investments

The company continued to emphasize operational efficiency through Project Fortius, which helped mitigate costs and enhance margins. Investments were also made in sales and marketing to drive long-term growth. Furthermore, Tech Mahindra launched TechM VerifAI, aiming to strengthen AI systems' validation and assurance to facilitate enterprise-level adoption of AI solutions .

Financial Health

Tech Mahindra maintained a healthy cash position, ending the quarter with $966 million in cash and equivalents. The free cash flow for the quarter was $106 million, translating to 104% of the net profit. The effective tax rate for the quarter was 26.6% .

Market and Competitive Positioning

The company emphasized strengthening its market position and was recognized as a leader in several services, including AI, life sciences digital services, and applied AI services. These recognitions, combined with significant deal wins, underscore Tech Mahindra's competitive edge in the industry .

Guidance and Future Outlook

Management expressed confidence in achieving better performance through continued focus on strategic initiatives and operational efficiencies. However, while there is optimism for future growth, especially with new deals and market expansion, the company remains cautiously optimistic about macroeconomic challenges .

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q1 FY '25 Earnings Conference Call.

[Operator Instructions]

Please note that this conference is being recorded.

I now hand the conference over to Mr. Mohit Joshi, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

[Mohit Joshi, executive]

Thank you, and good evening, everyone. When we had met in April, we had announced our strategic narrative scale at speed and our overall 3-year plan. I'm happy to share with you that in my meetings with clients across the world with employees and with other stakeholders, this strategic narrative has really resonated very well.

Clients across the globe have emphasized their need for a partner that can provide this unique combination of global reach and scale and agility. Q1 FY '25 is also the first full quarter since we have reconfigured the organization structure, and I'm very happy with the progress that we've made in aligning into the new service line structure.

For Q1 FY '25, we report revenue of $1,559 million, which translates into a sequential growth of 70 basis points and a decline of 1.2% year-on-year, both on a constant currency basis. We are reporting a robust growth momentum in manufacturing, about 6.4% Y-o-Y while the healthcare vertical grew about 6.1% Y-o-Y.

We see growth in North America and focused APAC markets resulting in an improved share of revenue from that region in line with our strategy. This is a seasonally weak quarter for our communications vertical, partly due to decline in revenues from Comviva, which tend to skew towards the second half of the year.

The new deal wins TCV for the quarter sums up to $534 million and is well diversified in terms of industry verticals and key regions. Notable deal wins during the quarter were: firstly, a deal with a leading U.S.-based Telco to build, modernize and operate various front and back-office applications for its wireless network services products portfolio. This application development deal involves developing an application for customer information management, dealer activation, portal and point-of-sale systems for the customers in direct channel stores, CXP and API integrations, case management and back-office operations across ETL, database and BI management services.

Secondly, TechM was also selected by a leading U.K. network service provider for a countrywide fiber rollout, running customer management programs and digital transformation through implementation of curated solutions dedicated on AI-ML, OCR and Hyper Automation by leveraging its network -- by leveraging our network services and BPS competencies.

Thirdly, we were selected by a Japanese automotive manufacturer, for the global rollout of its company-wide SAP implementation as part of its digital transformation program. And finally, Sharecare selected Tech Mahindra to design and develop personalized digital wellness platform for Medicaid members. This user-friendly mobile app platform was launched for Health Plan's Medicaid members, equipping them with essential tools to manage their health and navigate benefits with ease. Demonstrating exceptional collaboration and agility, Tech Mahindra and Sharecare successfully progressed from ideation and design to product launch in a record time of just 7 months.

I also want to take this opportunity to update you about our latest launch, TechM VerifAI. You may have seen our press release about this exciting new offering earlier today. It addresses what we believe is the missing link that will help companies move from pilots and experimentation phases to enterprise-level adoption of AI.

TechM VerifAI addresses the need for a robust validation and assurance framework for AI systems. Without this framework, there is a continued reliance on humans in the loop to validate outputs of AI programs. We feel that this is a missing link hindering the white scale adoption is also affecting the productivity gains possible from AI. This is why the leap from pilots to enterprise-wide adoption and commercialization has not fully happened.

The recent CrowdStrike incident has again shown the deep importance of validation and assurance more broadly. And this is one way we are highlighting the importance of this crucial component in building out the AI journey for our clients. TechM VerifAI's prebuilt 360-degree validation framework across the GenAI life cycle, customizable metrics, microservices-based architecture and seamless integration into existing technology stacks ensures faster and reliable AI value realization for enterprises. The solution validates data quality in the discovery and predevelopment stages to ensure security and accuracy.

Continuing on the AI front, I'm pleased to share that more than 25,000 of our associates have now been enabled with AI-led pair programming skills. We also now offer more than 100 AI-based solutions across AIOps, computer vision, workplace automation and more.

Next, let me give you some more flavor on specific aspects of our business. Telecom. As you know, we are the leader in this segment and work with 7 out of the top 10 largest operators in the world. Our enviable position in this sector positions us well to be the preferred partner for their AI investments. Accordingly, we are investing in AI and niche skill certifications. Tech Mahindra will soon have the largest TM Forum certified talent pool in the CSP IT service provider ecosystem.

Also, given our leadership and deep expertise in the sector, we anticipate benefiting from the cost rationalization related consolidation activity across regions. We are leveraging our strong partnerships with hyperscalers and ISVs to create and incubate a wide variety of AI part solutions across NOx, IT ops, field visit optimization and customer experience to reduce TCO.

Banking and Financial Services. We are seeing some new opportunities in existing accounts and also we have won new logos. We have won a managed services contract from a Tier 1 global bank and they have further awarded us the preferred vendor status, which sets us up well for the future. Select partnerships like Temenos and Guidewire are beginning to gather steam across the portfolio.

In the U.S., we are seeing improved spending across asset and wealth management, cards and payments, retirement, risk and compliance, insurance. On the other hand, investment banking and lending businesses are seeing some softness. Overall, though, given our relatively small size and the early stage of our transformation journey, I do expect to see some volatility in revenues here while we implement our plans to upgrade our BFSI offerings and client service.

One of our important differentiators in BFSI is the expertise we derive from our portfolio companies like CTCO, Tenzing and Comviva. For example, Yabx is a leading fintech company operating in emerging markets that is part of the Comviva portfolio. It is revolutionizing the digital lending and microfinancing domain by partnering with local banks. Yabx leverages advanced data and AI models to offer embedded credit products in partnership with mobile wallets, payment gateways, consumer and merchant aggregators and other payment networks.

The operating margin for the quarter stood at 6-point -- sorry, at 8.5%, an expansion of 110 basis points compared to last quarter. This was mainly due to cost saving efforts under Project Fortius and continued focus on operational efficiencies. Rohit will share more details on this. Again, the margin was 8.5% for the quarter.

We also see encouraging results from our efforts towards improved market positioning as we rise in ranking quadrants across industry analysts and advisers during the quarter. We were rated as Leader and Rising Star for ADMS in the ServiceNow ecosystem partners 2024 ISG Provider Lens study. TechM was rated as the Leader and Rising Star for Life Sciences Digital Services 2024 by ISG. We were rated as a Leader for AI in the applied AI services 2024 RadarView by Avasant, a major contender for insurance in the Everest Guidewire PEAK Matrix 2024 assessment. And finally, a major contender for healthcare industry cloud services PEAK Matrix assessment 2024 by Everest.

We are recognized not only for our capabilities, but also for our leading sustainability practices. Tech Mahindra has been recognized as one of the world's most sustainable companies of 2024 by TIME Magazine and Statista. We achieved the prestigious #1 position among all Indian companies and the 111th position globally.

Another feather in our cap was the launch of Project Indus, which as most of you know, is the first and one of the only large language model for indigenous Indian languages. This makes us the first among our peers to have built a large language model from scratch with 1.2 billion parameters, 22 billion tokens and a team of just 15 people. It was trained on over 100 gig of data.

With this positive start to the year, we are more confident that this will be a better year compared to the previous one. We will continue to focus on the planned actions for building a long-term sustainable foundation for TechM.

With that, I pass you over to Rohit Anand, our CFO, for run down on the financial metrics.

[Rohit Anand, executive]

Thank you, Mohit. Good evening, everyone. Let me begin with an overview of the company's financial performance for the quarter. We ended the quarter with revenues of USD 1,559 million, with a sequential growth of 0.7% and a year-on-year decline of 2.6%. Our constant currency basis, sequential growth is similar to reported and decline of 1.2% on a Y-o-Y basis. Translating this in INR terms, we registered a 1% sequential growth in revenue at INR 13,005 crores, which is also a decline of 1.2% on a Y-o-Y basis.

As Mohit mentioned, this quarter, the growth is largely broad-based, except for communication, where we see Comviva seasonality for the quarter. Our EBIT came at USD 132 million in INR 1,102 crores, a sequential increase of 16.2% and 22% Y-o-Y increase. The resulting margin is at 8.5%, which is an expansion of 110 basis points Q-o-Q, and 170 basis points on a Y-o-Y basis.

The margin in Q1 were impacted by a decline in revenue in Comviva and inching of a Visa call that we see in Q1 of the year, which was mitigated by operational efficiency and savings due to Project Fortius. We have also seen moderation in our subcontractor cost, which in the last quarter we had mentioned, is increased because of certain deal ramp-up. And other SG&A areas which were partially offsetted by the long-term investment that we had mentioned in a strategic narrative that will commit it to do to the business for long-term growth.

The effective tax rate for the quarter was 26.6% and the resulted PAT stood at USD 102 million in INR 851 crores, which is 6.5% of revenue, and an expansion of 140 basis points sequentially and 130 basis points on a year-on-year basis.

Our cash generation remains healthy as our free cash flow for the quarter was USD 106 million, which translates to 104% of the PAT. The total hedge book for us stood at $2.2 billion versus $2.4 billion last quarter. Based on hedge accounting, net mark-to-market gain for the quarter was $27 million, out of which gain taken to the P&L is $2 million and that balance taken to reserves of $25.6 million.

The DSO, including unbilled was at 93 days, which is an increase of 1 day on a sequential basis, but an improvement of 5 days on a year-on-year basis. Our balance sheet continues to be strengthened. Cash and cash equivalents as of the quarter close, stood at $966 million at INR 8,055 crores. Our deal wins for the quarter was at $534 million, which is an increase of 6.8% on a quarter-on-quarter basis and also an increase on a Y-o-Y basis.

The key highlights about our deal win are that most of these are, as Mohit mentioned, broad-based and in focused prioritized markets of U.S., Europe and selected pockets of APJ. And also from a service line perspective, the deal wins represent the mix for digital enterprise applications, cloud and infra and next-gen services.

The detailed tailwind of these deals are mentioned in our earnings presentation as well as in the earnings press release. If you recall from our previous quarter strategy presentation, we had mentioned about making investments about strengthening our sales and marketing practice. And one of the pillars under that was to strengthen our adviser and analyst relationship.

Following up on that, we held an Adviser Day in Pune, India. The event was impactful as research houses, their advisers and analysts were left with a much better understanding about TechM, its service lines and competencies and a strategic thought behind the scale at speed imperative. We also continue to invest in building our employee pyramid as we onboarded close to 1,000 freshers in the talent pool for the quarter. Invest in building our employee pyramid is going to be one of our largest margin expansion driver for medium as well as long term.

We will continue to do this as we move forward. Beginning this quarter, we also have started reporting interns for our BPL division which as a part of overall head count as a practice, which was around 2,100. So if you normalize for that on a quarter-on-quarter basis, our head count is flat. We've also made progress on our portfolio company integration front. We've completed full integration of 2 of our portfolio companies with a cold corresponding service line at TechM during the quarter.

So in summary, we believe the Q1 results had a positive start for the current turnaround year, as well as for our medium- to long-term strategy. As we continue to prioritize the strategic areas, we will continue to invest in the business for long-term sustainable performance.

With that, I will take a pause now, and moderator, back to you for Q&A.

[Operator]

[Operator Instructions]

The first question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management Company.

[Sudheer Guntupalli, analyst]

Mohit, congrats on a good set of numbers. So my question is outside the COVID high growth period, possibly, this is the first time in the last several years where we are seeing sequential organic growth in June quarter. So has the Comviva seasonality come down all this time? And will it be possible to call out the drag due to Comviva at both revenue growth and margin level during the quarter?

[Mohit Joshi, executive]

Yes. I think the Comviva drag from Q4 to Q1 is roughly about 0.5%, Sudheer. I don't know if that answers your question.

[Sudheer Guntupalli, analyst]

This is both at the growth and margin as well.

[Mohit Joshi, executive]

That's right, Sudheer. That's correct.

[Sudheer Guntupalli, analyst]

Okay. Got it. Got it. So -- and most of the companies reported so far have shown good growth in BFSI and they are positive that it will continue into the subsequent quarters. So I know -- I understand that you mentioned that there will be some volatility in our -- at our portfolio level. But broadly, if you can highlight a few trends in your key verticals, including communications, that will be helpful.

[Mohit Joshi, executive]

Sure. So let me -- because you asked about BFSI first, let me cover that first. See, our BFSI vertical is relatively small compared to our peer group. And we are in the process of crafting out a new strategy. As I mentioned previously, we have a new team as well. What we're focused on is a couple of things, right? The first is building out a new team to dig deeper into our existing accounts. So a huge focus on mining of the existing portfolios that we have. There's also a lot of effort going in for client logo additions.

In this regard, the 1 thing I mentioned, the large global bank that onboarded us as a preferred supplier this quarter is a positive movement. There's a lot of work going on from a solution development perspective, especially in areas where we have strength like core banking, wealth and asset management, insurance and payments.

And finally, we're looking to fully integrate the capabilities of our portfolio companies like a CTCO, BORN, a Citisoft and Sofgen. So with all these, I've been very confident and comfortable about the long-term outlook of our Financial Services business. But again, given the small size, right, from a quarter-to-quarter, just a couple of million dollars movement can inject a degree of volatility, but we're comfortable about the long-term outlook of the business.

And again, I feel that if you leave one of our peers outside, I think our growth on a quarter-to-quarter and year-on-year basis actually is quite good. We grew marginally quarter-on-quarter and declined only slightly on a year-on-year basis.

From a telecom perspective, look, I feel that our -- again, the telecom sector continues to be challenged. But if you look at it, from an FY '24 perspective for the full year, our telecom business declined by about 12.4%. But Q4, it declined by about 16.5%. But in the most recent quarter, the decline has come down to single digits now.

So I expect to see some level of year-on-year improvement in the telecom business over time. I believe that our sort of position in telecom from a competitive position remains very strong. We are present in 7 of the top 10 operators. And as I look at the priorities that operators have, these are broadly in 3 areas.

The first is on the cost side, whether it's vendor consolidation or it is autonomous operations and autonomous networks, we are active in that space. The second is revenue generation, both on the B2B side and on the B2C side. And on the wholesale network side, again, working on a number of initiatives with clients there. And finally, working with our clients to help them become AI-native telcos.

So while the telecom sector overall remains stressed and the spends are there to see across our peer group as well. I do feel comfortable that as the sector improves, as one of the largest players in the sector, we should benefit from an uptrend. I don't see it happening immediately. But surely, this is a large enough sector it should happen over time. Back to you, Sudheer.

[Sudheer Guntupalli, analyst]

And lastly, you spoke about development of a large language model. If you can elaborate a bit on it because our understanding so far is that only a few companies that do the product or U.S. Internet companies have been very strong on this. So if you can evaluate a bit on what are the use cases? Who are expected to be the clients? And what is our expected monetization model? That will be very helpful.

[Mohit Joshi, executive]

Sure, Sudheer. So look, they started off more as a research project within our Makers Lab in TechM. We were motivated to build out a large language model in the various dialects of Hindi because we didn't see one being commercially available. And we thought it would be an interesting and exciting challenge for our teams. It is one thing to work on large language models that other people have created. It's a different level of understanding of the complexity and comfort with the technology if you can build your own model from scratch.

And so we started out by collecting multiple data sources. We had a project called Bhasha Daan, which was actually to collect raw language primary data as well in the various language dialects. And we built this model over time. As I mentioned, it's got 1.2 billion parameters, 22 billion tokens and was built with a fairly small team. We are still working out and which is now hosted on Intel and Dell hardware.

We are still working out a commercialization model with various clients and various third-party providers, including within the group. Beyond Indus, we also built out a large language model in Bahasa Indonesian, working with Indosat, working on NVIDIA chipset.

So again, I feel that it really demonstrates the differentiated technology capabilities, the AI capabilities have taken that our teams are able to build complex models from scratch. Candidly, the commercialization models are not very well developed now, and I do not expect this to be a significant contributor to our revenues. It is more of a technology demonstrator from our perspective, Sudheer.

[Operator]

The next question is from the line of [ Rod ] Bajwa from Deepak Equity Research.

[Unknown Analyst]

Okay. I want to ask about your internal progress in making turnaround changes and also tracking your turnaround related metrics. You're still relatively early in your turnaround efforts overall. And I'd like to know if you can give us a sense of the internal metrics that are essentially allowing you to gauge the leading indicators of your turnaround progress.

[Mohit Joshi, executive]

Thanks for the question. So Rod, when we presented our strategic narrative and the turnaround plan in April, when we spoke about the scale at speed sort of journey, we mentioned that to drive long-term sustainable performance of the company, we are going to look at 3 pillars from a transformation perspective. The first pillar was linked to growth and growth was about being able to grow our priority accounts, our peak and prime accounts, the 20 million-plus accounts sustainably.

We have a program called turbocharge. We have dedicated client and delivery partners for our top accounts to drive more focus and we see an improvement in this over time. We also spoke about from a growth perspective, competency build, right? The investments that we are making in our focused service lines -- just Rohit spoke about the Analyst Day we did in Pune to drive more understanding of our competency and the value sharing that with the analysts.

And finally, for the growth piece, we spoke about the need to invest in markets in the U.S., in Europe, prioritized markets in APJ, which is also reflective of our deal wins this quarter and the numbers overall. Beyond this, there was the desire to build on our leadership position in telecom and manufacturing. You've seen the results from a manufacturing perspective and also to be a credible challenger in healthcare and BFSI, again, both sectors where we've delivered a good set of numbers for this quarter.

Beyond growth, there was a focus on margins, and we gave some metrics from margins perspective. For instance, what is the entry level as a percentage of the total workforce. As you know, we are one of the few companies that continue to imbibe fresh talent in our industry. We've had about -- added about 5,400, 5,500 people in the past 4 quarters. And we will continue to build on this.

From a margin perspective, we also spoke about CNB as a percentage of our revenues, including subcons. In this, we improved Y-o-Y by about 80 basis points here, as we continue to reduce subcon significantly and focus on other areas like offshoring. And finally, beyond growth and margins, we spoke about the organization and talent transformation, right? And from a talent transformation perspective, the #1 focus for us was employee upskilling. We have made progress year-on-year and quarter-on-quarter. We sold about the 25,000-plus people who will trend in AI pair programming.

Beyond this, we've gotten a Chief Learning Officer with a very ambitious and a very robust plan for training overall, including investments to build out training facilities. We spoke about the -- from an org and talent perspective, we spoke about the percentage of clients who were infused with Gen AI offerings. And again, you see progress over here, you see our new offering VerifAI that we spoke about today, which is focused on the assurance and validation space.

We also spoke about group synergy, where there's focused effort on working with M&M on the factory of the future, taking into our clients, work across more group companies and leveraging the M&M vendor ecosystem, right? So again, across these 3 areas of growth, margins and org and talent metrics, we're making good progress. We do have a plan to report this on an annual basis in terms of the progress that we make on the metrics. But I want to assure you it's something we are tracking very closely. And again, sorry, a fairly long answer to your question, but this is very, very critical for us.

[Unknown Analyst]

Okay. Great. And in terms of the follow-up, you mentioned some positive developments in the BFSI business and the long-term growth confidence there. I wonder how much of these positive developments in BFSI are due to an improved demand environment versus Tech Mahindra improving its positioning in the market. And one point on that, as we look at our research on enterprise buying factors, we are seeing enterprises often demanding more specialist skills from its IT services vendors.

And I wonder if that's part of your positioning in the BFSI vertical and if you're seeing that as a demand opportunity out there.

[Mohit Joshi, executive]

Yes. So I would say that the demand environment in BFSI is reasonably stable. Again, our peer companies have given very different interpretations. Some have spoken about green shoots. Others have been more cautious I think from my perspective, the demand environment is reasonably stable, not really growing dramatically.

I think we are benefiting from the fact that we have a new team. We have a significant amount of focus on the vertical and that we're able to both open new clients like the large global bank that I mentioned and dig deeper into our existing clients to build out our solution sets to gain from the synergy of the portfolio companies. So I would say that the gains that we are seeing are mostly based on our internal efforts and our improved market positioning.

Your second question was -- sorry, you had a second part of the question as well. Yes, it was about the demand for more experienced talent in the BFSI sector. And yes, I think for us -- this is certainly a differentiator for us. We do have the most experienced talent pool in the industry, significantly higher levels of experienced talent, and we position this to clients as being able to provide a diamond rather than a traditional pyramid. Obviously, we are working to improve or to increase the level of fresh talent that we have.

But even with those additions, I do expect that we will continue to have the most experienced talent pool in the industry both within TechM and obviously, certainly within the portfolio companies like a CTCO, like Citisoft or BORN that have very domain rich and deep industry talent.

[Operator]

The next question comes from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

Congrats Mohit, on a nice start to our turnaround journey. A couple of questions, Mohit. One is that if you look at the current quarter, growth has been driven by BPO, which has added close to $25 million to your revenue incrementally. And I also noticed that there was an acquisition announced of Orchid Cybertech. So what was the contribution of that to the revenue? And more generally, what has driven such a strong growth in BPO.

And a related question to it is that when I look at the BPO portfolio, it's quite heavy on contact center services or call center services. Does that worry you given that, that business will be the first one to be impacted by Gen AI?

[Mohit Joshi, executive]

Yes. So look, I think the BPO numbers are not really correct. They're not comparable, and Rohit will address this because there is a recast that we did as well of our portfolio. And so as it shared it's narrative, some of the revenue has shifted from IT services to BPO that's probably giving you that sense. The Orchid Cybertech acquisition is over 2 quarters old, so it doesn't really have an impact from a Q-o-Q perspective, Kawal.

Rohit?

[Rohit Anand, executive]

Yes. So Kawal, just on IT and BPO, we had some segmental change. So when you compare it to the relative performance, the $11 million growth for the quarter from last to this, you can attribute half of that to the BPO perspective and the half to IT. So it's kind of mixed. The change is what's driving the differential that you see on an absolute basis last year.

[Mohit Joshi, executive]

Yes. And then on your BPS question, more broadly, right? Look, I feel that our BPS business actually has been very, very innovative. And for instance, in the AI space, the BPS business actually has made great inroads in a couple of areas. One is obviously working with the hyperscalers and working with a lot of the AI native companies. As they get humans into the loop in several of the AI platforms, that's been a significant growth opportunity for us.

We've also been infusing AI into a lot of our contact center solutions and into our -- a lot of our platform capabilities. And finally, we are using GenAI to become a lot more productive internally. So I think this is an example of how our BPS business really has been, very innovative around areas like AI which is helping drive growth. A lot of our client base now is the Silicon Valley companies, the Cloud companies. Our contact center dependent as a company itself is very low, would be under 5% for TechM overall.

So I'm not too worried about any significant disruption from that perspective. It is small, and the portion that is there is very AI infused now.

[Kawaljeet Saluja, analyst]

Okay. And the second part of the question, Mohit, is that the market has been fairly active in terms of consolidation deals in telecom. There have been many mega deals and consolidation deals announced in North America, in Australia, even in Europe. Now I mean, this market is, of course, fairly competitive as well. So would you be playing into this market and consolidation deals? Or would you stay away from it given profitability considerations?

[Mohit Joshi, executive]

Yes. So actually, Kawal, look, that's a very good question, right? And it's a question about, as we had shared in the Analyst Day session as well that if we are -- obviously, we want to get growth and margin, right? But if we have to prioritize, we will choose margin. Now we did not want to get into a situation where we're competing for deals which are hugely cash-negative and hugely sort of margin dilutive, right?

Having said that, given the capabilities of the company, we are winning several deals. So for instance, the large deals that we announced from a last quarter perspective, includes several telecom deals, including with American operators, with European-based operators. Just this quarter, for instance, we have won a significant deal from an autonomous network operations perspective.

So we continue to be competitive. We continue to win telco deals. But again, these have to be deals on odd terms, right? I don't want to do the sort of deals that we have to then come back and make plans for magical margin improvements. We want to be -- again, given the stage we are in our turnaround, we want to be very, very focused on the sort of growth that we want and the sort of margin structures that we will accept.

[Operator]

The next question comes from the line of Abhishek Kumar from JM Financial.

[Abhishek Kumar, analyst]

Maybe to Rohit. Rohit, you had indicated plans to reduce our cost annually by $250 million and also spend 1.5% of the revenue in first year of turnaround, which translates to $100 million. Just wanted to gauge our progress against this target. It looks like good cost reduction this quarter, but there were some business-as-usual benefits that you indicated. So however, we now place against the target, and if we can give any indication of the cadence of this cost reduction or investment to the rest of it.

[Rohit Anand, executive]

Sure, Abhishek. So as I mentioned, when you look at the margin for the quarter, we've expanded 7.4% to 8.5%, right? The way to decompose that is, we have headwinds from Comviva revenue, which flows to the margin impact of broadly 0.5% plus we have impact on Visa cost and some other direct costs associated with that around 30 basis points, right? So that's the headwind we started off with.

With -- post that all the efforts that we did on cost optimization as a part of Project Fortius, net of investments, right? And we had clearly articulated to your point, that we'll continue to invest high for first year and then gradually is it down because that's where we need a long-term sustainable business to grow.

So when you look at the savings, net of investments, we see an improvement contribution to margin around 1.2%, driven by that. And then SG&A, excluding Fortius, we see seasonal reduction in cost that over the year will come back quarterly sequentially. So those are the broad walk from a margin expansion standpoint.

And we'll continue to report our progress of Project Fortius each quarter net of investments. And the buckets that we -- just to reiterate the buckets on investment that we clearly articulated continued focus on expansion of pyramid. We said we'll continue to drive learning and development investments in sales and marketing efforts, competency build, internal productivity tools for automation. So those are the broad buckets that we'll continue to prioritize.

[Abhishek Kumar, analyst]

Great. Just one quick follow-up on growth. I just wanted to understand, is the demand environment similar to what we had envisaged at the beginning of the year. And if things improve, does that present an upside opportunity to our margin target?

[Mohit Joshi, executive]

Well, look, I think the demand environment is pretty much the same as when we had spoken in April. I don't think there is any significant improvement, nor has there been a deterioration candidly. So it's still pretty much the same. Compared to a year ago, it's probably a little bit better. That's what we see. And obviously, if the demand environment should pick up significantly in the second half of the year, then it will be helpful from a margin perspective. Everything else remaining the same, right? I mean assuming that the attrition levels don't spike up massively. It should be positive from a margin perspective.

[Operator]

The next question comes from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Congrats on a good start to the year. Just first question, Mohit, I think one of the growth strategies which you want to look ahead is to drive the multi-services deals as well. So any progress on that? I -- it's too early to ask this question, but any pipeline which is shaping up, which can improve the order intake going forward?

[Mohit Joshi, executive]

Yes. No, thank you. I think that's a very good question. Look, multitower deals are very, very critical for us. We've set up a specialist group within the company, the Solutions and Transformation Group, which specifically focuses on multitower deals that are over $25 million in revenue, right? So this team will collect the inputs, build estimation models, create high-quality solutions. And through deal advisers and consultants and deal architects, actually shape their deals on the ground as well.

The -- for our largest accounts, we have put in a team of delivery partners over the past 6 months and the delivery partners also helped consolidate the capabilities from multiple service lines to give a seamless and a uniform experience to customers.

So it is very important for us. It is something that we track very, very closely. We look at the average number of service lines that our largest clients consume and we're very focused on increasing that. Obviously, in verticals and sectors where we've been present for a long time like a telecom or manufacturing, that number is higher, while in our newer verticals like Life Sciences and BFSI, the number is lower.

So there is a focused strategy to improve the service line penetration within our newer clients and newer verticals as well. So it's a very comprehensive strategy consisting of structural changes like building out the SST team of talent infusion like putting in the delivery partner into the accounts. And finally, through a mixture of incentives and measurements like the measurement of service line penetration in each and every individual account.

[Sandeep Shah, analyst]

Any thought on wage increase or wage hikes in the coming year?

[Mohit Joshi, executive]

Yes. So as of now, we have been fairly transparent with our employees that we do not see an opportunity for a wage hike at this time, and we will revisit it in the second half of the year depending on our financial situation. We were the first company last year to announce wage hikes.

So I think our employees, we have that credibility and trust with our employees, where they understand what we are focused on and the fact that we will revisit it in the second half of the year, if appropriate.

[Sandeep Shah, analyst]

And just a last question as a bookkeeping. I think offshore efforts, one of the lowest, which as a large cap Tech Mahindra has, and I did not hear that as a margin lever in most of the commentary by you and Rohit. So is it fair to say because of the acquired subsidiary, which are on-site driven, there is a hurdle to move the offshore effort materially going forward? Or are we also strategizing for as a material margin lever going forward?

[Rohit Anand, executive]

Yes. No, Sandeep, I think that's a good question. So from our perspective, one of the strategic pillar that we have shared with you in the 3 months back was better integration of portfolio companies, right? So we've said that our priority for the next 18 to 24 months is going to be prioritizing their integration into systems, into policies, procedure, middle office, back office. So that's a focus effort that we will drive over that period and continue to work on enhanced offshoring, which, to your point, will get more accelerated as we do go through that journey.

[Operator]

The next question comes from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Last year, we took a significant provision for onerous contracting altogether through the year, $6.7 billion. So are we continuing to do any of that as SG&A seems to be elevated.

[Rohit Anand, executive]

Yes. I think last year, as you know, as you saw in the businesses, there was some volatility, and we mentioned clearly that we were reassessing portfolio. We were reassessing areas we wanted to operate as a part of that strategy in areas where we could exist commercially in contract we did. Whenever we didn't want to continue, we box that as a separate runoff portfolio to execute and close. So as a part of that, these provisions were heightened last year to represent our commercial position on those contracts.

This year, as we move forward, to be more business as usual. And as we -- as an ongoing part of our governance and project and contract reviews, we continue to assess our risk. And as per the financial principle, if we see any risk, we will take cognizance of that and record in the financial books, but that will be now business-as-usual versus last year.

[Ravi Menon, analyst]

Just broadly, how should we think about any areas that you're thinking about improving your win rate substantially, because given the size of the portfolio, you need to improve in a large segment or, I'd say, material market segment, right? So which segments would you be looking at? Aren't you to given that digital -- it's not really early stage. I don't we're still probably in early cycle, but credentials have been set already, do you see any gaps for Tech Mahindra possibly even some tuck-in acquisitions can solve?

[Mohit Joshi, executive]

Sure. So look, I think we are very focused on our win rate, especially for large deals. It is something that we track very religiously. And the win rate is really a combination of what I keep telling our teams is that our solutions have to be comprehensive. They need to cover the full gamut of TechM capabilities. They need to be competitive from a pricing perspective. But most importantly, they need to be compelling, right? They need to tell a really powerful story. Like for instance, the fact that we have -- we are the only large SI -- or we're the only SI to build a large language model from an AI perspective. So we are thinking about the win rate in exactly the same way that you mentioned.

I do feel very comfortable that we have a full range of service line capabilities. We have a great set of clients in the sense, if you look at the old MBT clients or the old Satyam clients, we have a really good coverage of clients, and we have a very good track record with clients, right? The delivery capabilities and the delivery track record of TechM truly has been exceptional over time. We have a great talent pool, as I mentioned in my -- the question that Rod had answered -- Rod had asked about the very experienced talent pool that we have.

So we have no reason why we should not have an improved win rate. We are just being very systematic about it. We are being very focused about it. We are very clear about the segment of the market that we want to serve, which is the Global 2000 companies. We're very clear about the service lines that we have. We're very clear about the geographies that we want to play. And we feel we have a compelling strategic narrative and scale at speed. So given all these, I fully expect our win rate to tick up over time and a combination of an increased funnel and sort of an increased pipe and an improved win rate should give us significant benefits over time.

[Ravi Menon, analyst]

One last question you talked about 1,000 freshers being added, but when I look at the utilization, both including and excluding freshers, it seems to be the same. So have the [indiscernible] has already been onboarded and deployed in the same quarter?

[Rohit Anand, executive]

As they typically join at different points to quarter, the recent additions more towards the fag end. So that's why you probably don't see this.

[Operator]

The next question is from the line of Dipesh from Emkay Global.

[Dipesh Mehta, analyst]

Two questions from a vertical perspective, if one look at it. Retail and Logistics did well partly because of last quarter weakness. But if you can help us underlying trend perspective, any changes you are witnessing? Because some of the peer indicated inflation related impact on the sector and demand perspective, if you can give some sense around it?

Second question is data related about effective tax rate. If I look at [indiscernible], if you can give some color about how 1 should expect it to trend.

[Rohit Anand, executive]

Yes. Maybe I'll take the tax rate first. And Mohit, you can talk about the retail transport and logistics vertical trend that we're seeing. So on the tax rate, the effective tax rate for the-quarter was 26.6%, and we clearly articulated the -- our tax rate for the year should be in the range of 26% to 27% based on the structure we are in. So there are quarterly variations based on different items, but that's the normalized rate we should be in to expect.

[Mohit Joshi, executive]

Yes. And on the sort of retail CPG, travel, transportation, logistics vertical. Look, I think that this is, again, a relatively small vertical for us, but we do have good set of capabilities. So I'm quite confident that this number will tick up over the coming quarters. There is no significant underlying weakness in this vertical. But again, it's a relatively small vertical for us.

[Operator]

The next question comes from the line of Girish Pai from BOB Capital Markets.

[Girish Pai, analyst]

The CrowdStrike incident, which happened recently, do you think that could lead to some kind of shift of spending away from normal activity to maybe something focused in cybersecurity? That's question number one. Second, one of your peers, smaller peer talked about unexpected furloughs in certain sector high-tech. Are you seeing something similar? The third question is regarding margin -- segmental margins. IT segment seems to have seen a 600 basis point Q-o-Q improvement in margins. So can you just explain that?

[Mohit Joshi, executive]

Okay. So I'll answer the first 2, and then I'll pass it back to Rohit for the question on segmental margins. So look, I think as far as the CrowdStrike incidence is concerned, cybersecurity has always been a key focus area for our clients. And I don't see that changing. This was though not really a cybersecurity issue. This was an issue of a failure of the validation process. And that is why when I spoke about VerifAI, I mentioned that we feel a strong validation and assurance framework from an AI perspective is very important.

The only impact that CrowdStrike really had on us was a lot of our clients obviously had to spend money on remediation. There was a lot of effort involved in reaching individual machines and making changes. And wherever we were providing these end-user services or desktop services, clients are quite reliant on us, and they were very happy with the support that we had provided.

So to some degree, it has helped us strengthen and cement existing relationships. We were not using CrowdStrike ourselves, so we were not impacted as a company. That's the first piece.

On the high-tech piece, yes, there are 1 or 2 clients where there is an unseasonal furlough request. It is not material, I think, at this stage, and it is not widespread. So I really won't call it out from our perspective. And then on the margin question, let me pass you back to Rohit.

[Rohit Anand, executive]

Yes. So this time, we -- as I've mentioned, we've done a segmental change between IT and BPO. So if you look at the real performance on an IT perspective, we've increased quarter-to-quarter close to the company level improvement. And when you look at the numbers that you see are without -- on the segmental financials are without the unallocated costs, which is predominantly pertaining to IT, and hence, when you constitute that you'll get a similar improvement. It's at a company level average and not 600 basis points.

[Operator]

The next question is from the line of Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

I think you were trying to address the question that was to ask. So if you could clarify what exactly you were mentioning in terms of the reassignment because I see the reported IT servicing level to be almost the lowest level since 9 quarters. So what could you the other attributes other than the realignment that you just spoke about?

[Rohit Anand, executive]

Yes. So as I mentioned, we had moved to realign certain portion of the business to BPS, which better drives the synergies between the business, right? So that's why the baseline has changed. When you look at our earnings and press release, we've shown the performance Q-o-Q and Y-o-Y more aligned to the recasted numbers as comparatives.

So from that perspective, that's the way to look at it. And as we go forward, this will be the baseline to compare from a performance standpoint. So that's the change we've had. As I mentioned, if you look at Q-o-Q, the overall absolute increase in revenue is $11 million, and half of it is driven by BPS on a comparable basis and the other half IT.

[Rahul Jain, analyst]

Right. And just on this margin recovery kind of thought process that we have, is there a certain base growth assumption that is required for us to be in that zone because the clarity on the macro is not as obvious as one would like to have.

[Mohit Joshi, executive]

I think, look, on the margin side, what we have said, and I mentioned this in my response to cover just now as well that we will prioritize margin over revenue. So to that degree, we're quite focused. We do feel we have a significant number of levers to pull even in a flat demand environment. And also, the margin goal that we have given is a 3-year goal, right, from an FY '27 perspective. We have not given a goal specifically for FY '25.

Having said that, we are quite comfortable that we have enough reverts to push in our existing portfolio to show an improvement in margins, and we have already demonstrated it this quarter.

[Operator]

The next question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

While you've alluded to the focus in terms of reprioritization some subtle low margin or slow margin parts of the business. But if you could help us understand with regards to client metrics, we've seen a decline in terms of number of active clients, a number of 1 million plus customers over the course of the last several quarters. How much of this reprioritization essentially is reflecting in terms of the revenue drop that we see in the business?

[Mohit Joshi, executive]

The reprioritization or the deprioritization of customers has almost no revenue impact. These are -- wherever we have deprioritized accounts, it is because either from a geography perspective or from a size and attractiveness perspective, which really refers to the IT spend, they're not attractive to us. But most of these are very, very marginal customers. So we do not expect our pruning and shaping of our portfolio to result in a revenue attrition.

[Operator]

Ladies and gentlemen, we will take that as a last question for today. I would now like to hand the conference over to the management for closing comments. Over to you.

[Mohit Joshi, executive]

Thank you again. Thank you all for making time for us today. We feel happy with the good start that we've had to the quarter. This is still very early stages in our transformation and our renewal journey. But I feel very confident that with the team that we have and with the support that we have from all of you, our clients and our teams that we will make good progress. Thank you again.

[Operator]

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