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Tech Mahindra Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Q2 FY '19 Earnings Conference Call of Tech Mahindra Limited. [Operator Instructions] Please note that this conference is being recorded. I am now glad to hand the conference over to Mr. C. P. Gurnani, Managing Director and Chief Executive Officer for Tech Mahindra. Thank you, and over to you, sir.
Thank you. Good evening. Good day, and -- to all of you. Welcome to Tech Mahindra Quarter 2 Earnings Call. I'm delighted to inform you that your company has reached an important milestone in its journey to become a digital company of the future. Tech Mahindra has been highest ranked non-U.S. company and the highest ranked amongst IT services and consulting companies amidst all our peers. It stood 15th in the overall rankings in the Forbes Global Digital 100 list. It's a proud moment for us to see Tech Mahindra emerge as a digital thought leader, taking the world into the connected future and living up to its promise of connected solutions and connected services. And I do believe the recognition is also reflected in the company's digital revenue share, which included -- which, if you would recall, was 28% in Q1, has gone up to 31% in Q2. It's roughly a growth of 10% quarter-on-quarter.Regarding the Q2 revenue, we clocked $1,218.2 million, and in rupee terms, we are up 13.5% year-on-year and 4.3% quarter-on-quarter. But clearly, there's a revenue growth in -- I would consider that performance as tepid, and that is basically because of a little volatility in our Healthcare business. Nothing seasonal, it is more of projects coming to a close in 3 or 4 large hospitals. I think the company -- and when we go through the commentary, you would realize that company had always committed that we will work on our operating margins. The company had committed that we would work on shifting the revenue towards digital, and the company has committed on the Communication division growth and the company has committed on overall good performance. If I take away the HLS business, the company has grown well, both in Communication sector as well as in the Enterprise sector. In constant currency, Enterprise growth has been 3.5% in constant currency. Communication business saw a strong growth, 5% quarter-on-quarter in constant currency. And frankly, I am so happy because it's almost a good growth after a span of 15 quarters. I think the other thing which makes me feel very good is, and I think it is a record for us, that we signed $550 million worth of deals this quarter, which makes me feel very happy. Last but not the least, I mean operating margins, we're all on a weighing scale. And this is clearly an increase of 240 basis points, and if -- even if I take out a few fluctuations, which is the currency and the Visa cost, I think the company's operations have done very, very well. And in general, the company -- your company continues to add new customers. Your company continues to invest in technology. Your company continues to invest in some of the big bets, like 5G, Blockchain and cybersecurity. We continue to invest in innovation. We continue to invest in platforms. I think exciting times await us. I would let Manoj Bhat, who is the CFO, and L. Ravi, who is the Chief Operating Officer, to share a little more details with you. But I can only say is that, yes, we could have done better but overall, it has been a great quarter. Thank you. Manoj, you want to take over?
Yes, thank you, C. P. So clear -- I think. C. P. has articulated the broad brush of the quarter. I think going a bit into detail. I think, if I look at constant currency revenue growth, I think it was about 0.4%. And within this, clearly, there was about a negative in excess of $40 million coming from our Healthcare business. And without that, I think, we grew about 4.2% in CC terms. I think in terms of the margins, I think the margin improved about 240 basis points. Just a quick high-level breakup, I think absence of Visa cost [Audio Gap] points and currency impact was about 80 bps. About 140 bps was operational efficiencies and business mix, and then we had wage hikes for a portion of our workforce, negative of about 40 bps. So I think that kind of -- is the journey from 16.4% to 18.8%. I think the other thing during the quarter was that, I think other income was about $25 million compared to $16 million in Q1. Almost all of it was because of the translation gain because the rupee has moved quite a lot during the quarter. From a profit after tax, it was about $150 million, $149.4 million versus $131 million and in INR terms, it was about INR 1,064 crore. Coming to the cash flow metrics, CFO, or cash flow from operations was about $141 million, which is 94% of PAT and compared to last quarter, that is $109 million, so there's a substantial increase in CFO. Free cash flow was also up to $120 million, which is about 80% of PAT versus about $81 million in Q1. Overall, cash and cash equivalents were down [Audio Gap] pay out of about [ $120-odd million ]. I think that's come down a bit. Hedge book was about $1.6 billion versus $1.45 billion in Q1, so it's gone up and that's in line with our policies. I think overall, if I step back, I think it's been a satisfactory quarter on the margin front. I think a lot of our metrics around deal wins, around digital growth are quite robust, and we look forward to continuing this journey. With this, I'll throw the floor open for questions and move forward with the call. Thank you.
[Operator Instructions] First question is from the line of Sandip Agarwal from Edelweiss.
So good times are back. Margins were really a bit positive surprise, even the revenue growth was looking fine, ex of that some disappointment in the other vertical. So my -- I have 2 questions. C. P., one, what is the change in environment you're seeing versus what we have seen earlier? Are we consistently seeing upbeat in the mood from the client perspective? Are they open to giving more deals and the size of deals are increasing? And if yes, where we are seeing big positive surprises coming in? Secondly, past the telecom pain -- now, can we confidently say that we are past the telecom pain, which we have witnessed over last so many quarters? And if I could follow up, for Manoj. Manoj, can we take this quarter's margin as a base margin now ex of wage hikes going forward? Because I think we lost a lot of margin last several quarters, and last 4, 5 quarters we have started regaining our margins. So still, do you see ex of currency there is some more positive surprises coming? Or you think that you will pause here and try to grow more first?
So let's address the 2 questions that -- on environment and the telecom spend. I think on the environment, I mean, it continues to be a mixed bag. U.S. economy, you all know that the positive velocity that China or Japan or Europe -- I mean there are changes happening in their economic structures. Middle East continues to have pleasant sides as well as a few difficulties. So overall, I would say economic climate, since our business is 48% U.S. and 52% rest of the world, I would say is that, to us, there is a greater tolerance and flexibility to compensate for some of the swings. And right now, yes, there is a demand for the digital, yes, some of our tool sets. So I'll give you an example, just -- for example, my BPO business, we have added about 5,000 employees. And our BPO business is -- because your customer experience, management is taking a higher priority despite of much higher level of automation, much higher level of productivity, but just that customer intimacy is becoming so much more important. So that is one part that I would like to say. On telecom, I think it is more to do with telecoms in general know that they need to equip themselves to become better players in the market. The fact is that the growth is coming in data communications and to be able to leverage the growth in data communications that the CapEx spending has increased. Number two is, some of the systems of the past are in need to be modernized. So the basic philosophy that we followed across our customer base, which is run the operations better, change or grow the business together, I think has worked out well. It is more of -- there is no new wave that has come in. We are all working towards the new way, which is the 5G. But at this stage, I think it is more of operational efficiency improvement of our customers and being able to work better and being able to sign a few large deals. Manish, if you're on the call, you want to add anything on the telecom side?
No, no, C. P. I think you have articulated it quite well. I think, it's indeed, like you said, the telecom industry is continuing to go through the process of transforming itself and there are multiple players out there. We have always maintained that we have pulled the strategy together to keep a multidimensional, very diversified portfolio that helps the service providers to improve their operation, be ready for the future and then eventually take advantage of the opportunities that come forward. So all the actions that we have, including some of the deal wins are all very, very aligned to these strategic bets that we have taken. So we'll see how it goes on from here on.
Does that answer your question, Sandip?
Yes. I had a question for Manoj as well on the margin side.
Yes, Sandip. So I think your question was, is 18.8% a new baseline, and I think, do we see margins improve from here, ex of currency? So to me, clearly, I think this is a journey, and we've talked about this in the past, and we had set certain goals for 6 quarters till March 2019. And I think we're progressing very well on the journey. I think margins will go up, albeit, I think the pace of margin improvement has been quite fast. But I think we'll see gradual margin improvements is what I would build in as a base case from here over the next 2 quarters, I don't think we have commented going into FY '20 and beyond. But at least in the next 2 quarters, I would -- our goal would be to do gradual margin improvement from here.
The next question is from the line of Viju George from JPMorgan.
I had a question on HCI, it's pretty sharp drop out there. I'm just curious as to what kind of a business it can be if revenues drop more than 50% in a quarter's time. That's one. Secondly, therefore, do you see new wins out there, which can also bring about a kind of v-shape back revival?
So Viju, this is Manoj. I think it's a good question, and let me explain the business a bit and what was playing out then. And this is not something new, we had pointed this out that there is implementation revenue in there, which could potentially drop off. So -- and we had said that in Q4 as well as Q1. We were very aware of the cycle of implementation and then new orders coming in and new implementations in this business. So if I look at the entire provider space and what HCI does, I think they do implementation, training and go-live support, right? And the moment it goes live, I think the revenue drops off very, very sharply. And so from that perspective, I think there was a big wave, where I think there was 6 or 7 hospitals and providers who were going through this phase. And HCI was in a position where it was -- it had won all of those deals. And that is where the ramp-ups were very, very steep over the last 4 quarters. And what -- it so happened that the -- coincidently, all implementations ended, probably in the span of 1 or 2 months at the end of Q1 then going into Q2. And so I think as we speak, of course, the new order book is building up and this is going to be a little bit of a year-on-year picture of HCI. I think on a year-on-year basis, the business will show growth. I think their target will be to grow in excess of 10%. And that's something which I think they feel pretty confident in terms of the management team. So that's the way to look at it, and a little bit of this business is going to be like this. And to your second question, is it more in the nature of staffing? I think, ultimately, if I look at the model of sourcing, there's always going to be a core group of employees who offer these services within HCI. But obviously, with these steep increases and decreases, we do also depend on a lot of temporary employees because that's the nature of the business. But to that extent, yes, there is going to be external thing up and down. But if I look at the core group of people who offer these services, who think through these programs and who offer this kind of support, I think that continues to remain as the HCI's core offering. I don't know whether I answered the question?
Sure. So but Manoj, just taking this forward, the revenues are more than halved. So while you did point out that you will see some impact in this quarter, I reckon that the actual decline must have been sharper than what you expected or estimated. That said, do you think that there is a potential for this business to get back to the revenue base that it saw? And what does it take to get there, and how are you tracking against that?
So from a -- so the nature of this business is very difficult to predict. Because it's also -- towards the end of the cycle, it's a bit need-based. So I mean, it's very difficult to estimate what the exact drop can be. So to that extent, maybe your impression might be right that maybe it's a few million dollars more than what we thought. But to the broader point is, I think more orders will come in, and I think we will see revenue growth coming back in -- going forward. And I mean all we can do is this is the business -- If it goes up sharply, we will come back and tell you that this is another implementation cycle starting. And the other strategy we are using is, I think we are winning now synergy deals, which then kind of balance out the revenue streams on a quarter-over-quarter basis. So that the perspective in terms of how to model it quarter-on-quarter, I think it becomes a little bit easier. That's the effort we are doing to balance this kind of implementation cycle curves out.
So I have one last question. Obviously, this has been a very strong driver of the growth in enterprise side of the piece over the last 4, 5 quarters. Looking forward, if we take this out, given that it is inherently unpredictable so while the worst may be over you don't know what the nature of the upside will be, do you think that the rest of portfolio can go sufficiently stronger than in the past to get the same kind of growth going forward in the enterprise side?
Actually, Viju, I think the way this is phased out, right, it's kind of -- it is across 2 years. So even if I do ex this growth, right, whether last year or going into this year projections, I think the impact is not so severe, number one, right? And number two, I think from a perspective of overall enterprise, I would like Manoj to add to that question because it's a question of broader enterprise growth. And Manoj, maybe you can talk us through how do you see broader enterprise growth?
Yes, thank you very much, Manoj. So Viju, in terms of the overall enterprise business, despite the challenge that we've had this quarter on account of the HCI business, still if you look in constant currency terms, the overall enterprise business has grown by 9.2%. And we have been maintaining that our business will grow 8% to 10%, so clearly, we are on track in terms of whatever we have been articulating. Again, I think our diversified portfolio plays to that advantage and you would see that, if I keep the HCI business aside, in constant currency terms even this quarter, the enterprise business has grown by 3.5%. Clearly, some verticals will do better than others in each quarter, and we have been saying this and we have been maintaining this that it's not that you're going to see every vertical grow substantially every quarter. There will be some verticals, which will do better than others. So for example, in this quarter, the retail vertical has done well for us. So I think we will continue to see consistent constant growth in the Enterprise business. It may come in from different verticals at different points in time and clearly, the numbers speak louder than words. So we continue to maintain our stance around the overall broad-based growth, 8% to 10%, in terms of constant currency across our portfolio.
The next question is from the line of Diviya Nagarajan from UBS.
Congrats on the margin improvement in the quarter. Just following up on the enterprise services question. What do you see as the overall growth for Healthcare, given that the HCI acquisition is currently looking at some amount of replenishment there? So for the next, say, couple of quarters, what are we looking at in terms of growth? That's question number one. And secondly, I am sorry if I missed it earlier, you seemed to have had very strong contract wins this quarter. Could you please run us through the mix across telecom and enterprise segments in terms of what contracts will do?
So Diviya, I think maybe the Healthcare perspective is better appreciated on a full year basis, right? So I believe there'll be quarter-over-quarter growth, right, going into next 2 quarters. But overall, I think, if I look at whether it's HCI or our other healthcare business, I would say, our target would be like double-digit growth, and that's what we're going to try and achieve. Moving on to your other question, out of the $550 million of deal wins, roughly $300 million is Communication and $250 million is Enterprise. And if I look at the deal win composition, I think it is, obviously, if I look at the Enterprise side, the whole customer experience management, the whole integration of some of our platforms to deliver solutions and the customer experience area. That's been a big component of deal wins. There have been very interesting wins on some of the transformation programs in infrastructure and so on and so forth.And on the Communications side, I think clearly, first of all it is geographically dispersed. I think it is pretty much all the way from ANZ to the U.S., and so it's across multiple areas. So to me, the way I look at it is, these are typically 4- to 5-year kind of deals, and some of them might be shorter cycles where there is just a transformation. But that's the way I would look at it. Does that answer your question, Diviya?
Sure. And just a follow up on HCI, the slowdown or the lack of implementation pickup. How long do you expect this to last? And when you think that we'll see replenishment of those contracts? And sorry, the last follow-up is on margins. And we've kind of reached around the target margins that you were talking about for the year, how should we think about where margins are likely to head from here on? What's the target now?
So on HCI, I think, clearly, my sense is -- and I don't have a number for you in terms of what could be the growth and so on and so forth. My sense is it'll gradually build up going into Q3 and Q4. I think today I have no full visibility to full replenishment but partial replenishment will happen as the deal wins translate into revenue. So that's on the HCI question. On the margin question, clearly, our internal targets were always higher and we will go to a higher number. What's happened is of course that there are 2 things playing out, right? So as the digital revenue acceleration is happening and as we substitute some low yield revenues with higher yield revenue streams, I think there's a inherent margin lever which is coming. And then, of course, there is an automation, AI and all the other initiatives, which we spoke about. And to me, I think, I don't think I have a new target or new aspirations which we have disclosed. But as I said, there will be gradual margin improvement over the next 2 quarters is what we would...
The next question is from Pankaj Kapoor from JM Financial.
So my first question is on the revenue growth. If I look at last quarter, obviously, we had a seasonal impact. And this quarter, again, we had an HCI impact, which was probably higher than what was initially anticipated. But if I look at it as a portfolio, the growth in the first half would be significantly lower than what some of the peers have reported. So A, how do you look at this whole portfolio going forward improving in the second half or even from a longer-term perspective? By when do you think that we should be getting our growth rate moved closer to the industry. That's my first question.
So Pankaj, that's a good question that, if I look at it from headline number, right. So -- but as we mentioned that overall and some of this is CC terms, 8% to 10% was our goal in Enterprise. I think we will hit that. On the Comm side, clearly, after quarter 1, we were talking about growth over 3 quarters, and which is also happening and the deal wins are reflecting the core health of the business. So I do take your point on the first half. Obviously, there is no piece of the business we can exclude in terms of the portfolio. But what we were trying to do was kind of point out that various pieces of the business are moving differently and that's the reality of the business. So to me, I think over the next 2 quarters, we do see growth coming in the overall business. And that's something, which historically, also the second half for us has been usually better than the first half, and I think that trend will continue. And as we look forward, I think there are opportunities which will be there, both on the Communication side and the Enterprise side, and as and when the quarters go, we will talk more about it. So that's a quick view on how we're thinking about growth. And there's no denying your point is valid that net-net, if I take the top line, I think whether it is currency, whether it is some seasonality, I think growth has been lower than where it was maybe some time back.
Sure. And in terms of the deal wins, of course, this was probably one of the best quarter you ever had. Can you give a sense like whether this was all net new or was there any renewals also in this?
So if I include renewals, the number is bigger. So what we do is, if there is a renewal with an increased volume, we only report that net increase as a deal win, yes.
Okay. Yes, so I can take this as probably net new, excluding any renewal?
Yes, you can.
Okay. Got it. And Manoj, lastly on the margins, is there a kind of a level which you have in mind where, beyond which you would like to invest the incremental efficiency gain or even the currency gain back into the business to probably target a higher growth rate? I mean, if I go back into the history, we had been, maybe 3, 4, 5 years back in the range of around 20%, 21%. So is that the kind of a level one should be looking at? And beyond which you would like to probably invest the efficiency and the currency gain back onto business to strive for higher growth at the top line? Do you have some of those targets in mind if you could share that?
Yes. So Pankaj, so couple of points I'd like to make, right. So first, it's not that we are not investing. So we've had a quarter, excluding HCI, of 4.3% in constant currency growth, so which is, obviously, at the top end of growth for I think whichever results you take, right. So clearly, a lot of the business things are working and so I don't want you to take away that we are not investing and hence the results are not coming. Because there's a lot of investment going on, whether it is the tech bets, whether it is in terms of reskilling, whether it is in terms of partnerships. So that's something which I think we are adding front-end salespeople. We are looking to add specific capabilities on site. All of that is happening within the numbers. In terms of the margin, at what point will we say that this is something which is an optimum margin? I don't think we have any such definition in mind today. So I think we are going to work towards both revenue growth and margin improvement to the extent possible. But at this point, I don't think we feel that we are constrained by margin improvement and that is not a reason for, I think -- at least the presumed lack of headline growth because if I dive deeper into the number there is growth coming in most of the pockets of the business.
All right. And if I can squeeze 1 last question on the DSOs, which have been going up every quarter. So what's the thought process on that, and which obviously is impacting our cash conversion as well.
So first of all, it's not impacting our cash conversion. So obviously we can do better. That's not -- so but if I look at the metrics, they're in about where they were. Secondly, I think the DSO this time I think about 2-odd days have been added just because of the currency movement because we convert all the AR into rupees at the quarter end rate and revenues are generally converted at the quarter average rate. So there is a difference about 2-odd percent, which makes -- so which makes a difference of about 2, 2.5 days roughly, right? So part of that is there. But your point is taken, I think this is an area where we are stepping up our efforts, and hopefully, we should see reductions going into Q3 and Q4.
The next question is from the line of Jiten Doshi from ENAM Asset Management.
My observation is every time we have these negative surprises, they are only from these acquisitions. I think last time also, our margins were in excess of 20%, and then suddenly -- I think we need to get into the right acquisitions. As shareholders, we are feeling somehow that this strategy is not working optimally. That's my first point. And second is, that somehow the other -- our margins are getting diluted due to do acquisitions. So unless it's extremely strategic, and if it strategic, it should be margin enhancing. What is your view on this really?
So Jiten, this is Manoj. So I think -- so fair point, right. So if you look at, one of our initiatives was that if you look at our entire set of portfolio companies, we identified it as an opportunity where we significantly need to improve our performance. And if I look at 4 quarters in, I think there have been significant improvements. But I would still say there is a huge opportunity there in terms of improving margins. So our margins are continuously improving over every quarter. Our synergy revenues are starting to kick in on some of the later acquisitions, and we are far better aligned on operations. So I think all of those are happening. I think to your broader question, currently most of these acquisitions are clearly more on-site centric, so as a rule, they're probably lower margins. And also, a lot of the synergy revenue which already exists. For example, let me give you the example, SOFGEN. While SOFGEN acts as the front-end entity, but I think the synergy revenues are delivered from the offshore entity. So clearly, the margins and the revenues will flow through into the offshore entity. So the numbers reported per se might not be a true reflection of the success or failure. On the broad acquisition philosophy, we made a change in that in terms of how we think of these acquisitions, and we have started pursuing the acquisitions, which will potentially be margin accretive, and that's something -- The second thing we did is, obviously, go in for smaller acquisitions, so some of these changes we've already made. So I think I personally view it as an opportunity set, again, for the next 4 quarters to work on this and improve it. And your points on that they're dragging margins is still true. So I think we will have to work with them and work with the management teams there to improve margins and improve revenue growth.
So this question is for C. P. C. P., I think in last 18 months, there is a particular momentum in the company and there is a ray of hope and optimism, and we have seen very good things happening in your company. Now in the midst of this momentum, we should not take large acquisitions, which again drag us down. I have no doubt in my mind that this company can deliver a 20% EBIT margin. If you don't do it over the next 18 months, I would be very, very surprised. Because I think that most of the top-notch companies are delivering that, and I don't consider you as any company less than the top-notch companies. So I think our focus should be on bringing back a 20% EBIT margin in the business, and our focus should be on keeping this momentum alive. I can see that there is a clear direction, momentum and everybody is quite upbeat. In the midst of that, if we do a large acquisition, which will be dilutive to our margins, earnings or which will not be integrating quickly, I think will hamper this whole process. And once again, we will go back to 2016, '17, where we were -- where the whole company really suffered. So this is my observation and I would request that you please consider this.
Jiten, I think C. P.'s line has got dropped. I will convey it to him.
Yes, but I think this is for all of you, please. Because there is a good momentum. There's a good traction, everything is upbeat. I think now if you go into another billion dollar acquisition and drag the whole thing down, I think it will put the whole firm down again. I think there is no doubt in my mind that -- would you rule out or 20% EBIT margin, probably as a company coming back to that level?
So there are -- Jiten, I don't think we give guidance, so there's nothing we are ruling out right now. So as I answered Pankaj also in the question before, I think there is a set of initiatives. We're going to let it run. And of course, the pace of those -- the pace of results from those initiatives has, obviously, far more accelerated than we thought. But as I said, we're not stopping because of that. We're continuing on this journey, and I don't think we have a number in mind saying we'll stop here or we'll stop there. So that's my short answer. I know you're looking for a more specific number but...
No, I'm not I only have one suggestion to your entire company, that please consolidate what you have taken on hand. Please take the margin to 20 -- 18%, 20% EBIT margin, which is higher in terms of EBITDA. Please stabilize whatever you have on hand, come back to where you were. When I talked about 20% EBIT, you've done it in the past. So I'm saying come back to where you were and once you've come back then take a real look at all of that. So I think you cannot ride so many horses. Because I think last time that the company went absolutely off track was during the time when they made these big acquisitions, 2, 3, 4 acquisitions, which did not work well for the company. We don't want to go back in that stage for sure. Everything is upbeat, there is a momentum and we need to be cautious. And I think there are a lot of tailwinds we're enjoying. Why don't you ride all of them? And don't think of any acquisitions at this moment till you stabilize the base. That's all I have -- my observation and my suggestion to you is.
Yes, sir, taken on board.
The next question is from the line of Mukul Garg from Haitong Securities.
I just wanted to dig a bit deeper into the Communications vertical, which performed quite well this quarter. Manoj, can you help us understand...
Sorry, I lost you in between. Could you repeat, please? I lost the question in between. Sorry.
Yes, Manoj, so basically I was just trying to dig a bit deeper into the Communication side, which did well this quarter. So can you help us break this into impact which came from the deal wins, which you have done in the last couple of quarters, and the structural change which is just happening in this sector? And if it is the later then basically what has changed in Communications compared to last couple of years? Which are the areas where you guys are winning more, is it more in industrial space or is it more a rebound which is happening in the larger client base of yours?
I'll request Manish. Manish, if you're on the call, please, if you can cover your perspective on that question, share your views.
Absolutely, absolutely, Manoj. My pleasure. So Mukul, thank you so much. The good news is that almost all the wins that we have had, the larger ones as well as the small and medium ones that we have closed. All of them have a very large element of digital and transformation to that. The one that we have done in Asia is putting a new digital platform for both customer management as well as the downstream business management systems. And the underlying driver for putting that whole transformation program together is to get the service provider ready for helping them play into more digital services going forward, which will start in their world once they get ready for 4.5G and 5G and beyond. So in many ways, it is not a network deal, that particular one, it's a transformation -- digital transformation deal, but it has got 5G written all over it. The another deal that we have done is a very operations transformation deal. But a big shift that has happened is it is not a lift and shift type of a deal. It is a deal that is built on lot of autonomics, a lot of digital platforms that we've put together to help predict the customer engagement, customer responses, the service assurance, the new service delivery. And that is also in the enterprise space of a service provider so that they can be ready to start demanding more business from their enterprise customers as they deploy new network and new assets together. So in many ways, these deals that we have done and that also figure-in prominently in our pipeline is this deal in all in the transformation in the digital and in the new telco of the future network of the future-type models. And when I say all, as in some these transformation deals that we are currently fighting are in that category. I wouldn't attribute these deal wins to any one particular factor, whether it's a structural change or anything else. I think it is a journey that we are on, which is powered by a strong need for the service providers to continue to reinvent themselves and for us to continue to deliver on the investment that we have continued to make. And on an earlier question Manoj was saying, which is absolutely correct, that we have continued to invest -- we have not taken our eyes off the ball from the future as we have continued to correct our current operating matrixes, which also applies to the telecom business as well. So I hope I could answer your question, Mukul.
Manish, so do you think that you guys are more prepared now versus earlier to offer these services to your telco clients going forward as well? Or do you think these -- it is still a bit dynamic scenario where things will keep on moving up and down as far as spending is concerned? We clearly understand that a pure 5G spending has still not started but the whole shift spend towards distal, is that pickup sustainable over the next maybe year or so?
Please don't get me wrong when I say this, Mukul, that I don't believe, and I have always maintained that we've always been better positioned in the industry to take advantage of the opportunities as they come. Because we have been consistently staying invested and focused on our strategy, our portfolio, the markets. We definitely did go wrong in our execution in 1 or 2 of the acquisitions and a couple of initiatives. But in terms -- but even those have allowed us to play very prominently now in the areas where the focus and the growth will be, right? So I think we remain focused, and I believe that your company continues to remain very well positioned to take advantage of the holistic opportunity that will come up as things evolve in the telecom and the media space.
Understood. My second question for Manoj. Manoj, if we look at the other enterprise business, excluding the HCI, there are a few verticals, which have been relatively weaker over last couple of quarters. And that trend has been quite stark compared to what the rest of the industry is talking about, especially if I look at the BFSI space. I mean after many quarters of good growth, when the whole industry was delivering weak performance, the last 4 quarters have been quite weak for you, whereas the commentary from others have been improving. So can you help us understand how we should look at this areas like manufacturing and BFSI going forward?
Yes, so thanks for that. So first of all, on manufacturing, as I said, we have shown good growth over the last many quarters, and I'm sure you'll agree with me. This quarter is -- while it's benign on a quarter-on-quarter basis, but if you look at the numbers on a year-on-year basis, our business has grown 11%. So I think that's decent performance. Coming to financial services, you've rightly said that in the past when everyone was challenged, our business did grow well. So in fact, last year, you would perhaps remember that our BFSI business grew by 18%. So clearly, to some extent, there is a base effect. My belief is that our pipeline on BFSI is strong and you should see growth coming in from this sector going forward in the future. So I would say what you have seen in the last couple of quarters is more a result of a much higher base as compared to what we've traditionally had and our pipelines are building up well, so hopefully we should see the results.
The next question is from the line of Sumeet Jain from Goldman Sachs.
Firstly, I wanted to just understand on the telecom vertical side. I mean I remember Manoj, you gave a guidance of probably low-single digits what you can achieve for the full year, given we had a significant decline on the first quarter. So are we still looking at that kind of a growth for the full year, given the kind of deal wins you already have? And also that implies close to 5% to 6% CQGR ask for the remaining 2 quarters?
So every quarter, we have cross currency PATs, so I have to keep reworking the numbers. But suffice it to say that I think there is momentum in the business, and I think what we said is that every quarter it will grow. Now CQGR 4%, 5%, 3% is a different matter. You know historically second half is stronger for us in the Comms vertical specifically. So I think that's where we stand today. So -- and I think the momentum is there, the deal wins are there. And you heard Manish, and Manish, if you want to add anything to the commentary there?
Yes -- no, no, not anything on the numbers, Manoj you've answered it. All I would just say and reiterate that we continue to remain very busy with the kind of opportunities that we have closed. There are similar patterns. And the good news is at this point, I think, Manoj had alluded to it earlier I believe that the growth is pretty comprehensive in terms of even a regional mix. So we are seeing a pretty good traction across almost all the markets that we are operating in, and we continue to remain hopeful that we will maintain. Of course they are subject to several other variables, some of them are not in our control, but we continue to strive hard for what we said that we want to continue to do.
Got it, got it. And secondly, I can see your SG&A expense levels were a bit elevated this quarter. So from the forecasting standpoint, how should one look at it going forward?
I think from an SG&A perspective, you should expect it to moderate back over a period of time. So there were certain expenses which we make -- which are in the nature of an investment over a shorter period of time. So as those kind of go through the system and as we get revenue in return, some of those will moderate back to the older levels, I would say, yes.
And lastly, on the tax rate, again, it was a bit high. So any guidance for the full year?
So I think our guidance remains about 24%, 25%. This time, I think there was kind of a onetime tax of about $4 million. So if I remove that, I think we will be in that range, and that's the range we are consistently looking to be in, right.
The next question is from the line of Parag Gupta from Morgan Stanley.
I had 2 questions, both on the Communications vertical. So the first question is, you had some really good momentum in deal wins in the telecom vertical in the second quarter. Could you give us some sense on the visibility or the pipeline and how that is building up, so can we see the same momentum continue going forward as well? And the second question is we have heard some of the larger peers talking about getting interested in the telecom vertical, especially given the rise on 5G as it starts rolling out globally. So the question is, are you seeing any increase in competitive intensity, or do you think it's more or less similar to what it used to be in the past?
Parag, I will request Manish to address those 2 questions. Manish?
Absolutely, absolutely. So Parag, I think the deal momentum is good. It is very consistent, not only with the deals that we've announced, we have similar deals in the funnel right now. I just cannot predict when do we close those. But they are also consistent with -- very consistent with our credentials and our portfolio and the kind of business that we have been saying that we are investing in. Across the run, change and growth portfolio and across the bets we've taken between network, software, Managed Services and customer experience transformation. So all of that remains. We know where we're playing. More importantly, I'm sure you'll like when I say this that we have also decided many areas that we will not play anymore in. So that we have a more predictable and a better chance of succeeding going forward from an execution standpoint. That was the first part of your question. What was your second one?
Are you seeing an increase in competitive intensity in the telecom vertical?
Well I know -- I think I wouldn't say it is more or less, it is always high. There are more people who are always excited about anything that is high on the hype cycle. But there is a greater degree of maturity in the industry right now in terms of knowing the people who have deep and deep-rooted expertise and also the ability to transform versus people who are building their capabilities fresh. One thing that we have always said, we have consistently maintained that in each of these areas in telecom, particularly in the network business, the entry barriers are very, very high because the skill levels that are needed are pretty complicated and very diverse. So I wouldn't say that we are overtly worried. But the fact is that the kind of business we are building in telecom, we don't really have one-dimensional competition. It's always very different type of people that we compete with. In some cases, we don't even compete with the other peer group that you all compare us with. We compete with a very different type of company. So it's always exciting, it's always challenging, and these are the people who keep us honest to our capabilities and commitments. I wouldn't say it is anything different than it was in the past.
The next question is from the line of Sandeep Shah from CGS-CIMB Securities.
Just a question, again, a follow-up on the telecom side. Manish, just wanted to understand that suddenly, there is a big momentum which is building up in terms of a deal pipeline, and you alluded that it is coming across various markets and it's not skewed to few accounts. So what has led to this? Is it also a factor of vendor consolidation which is helping you, because we get to hear that the balance sheets of major telcos are actually under stress. So what has led to these kind of a decision-making, which is getting accelerated for the large deal awards as a whole? And when you say that they are getting ready for 4.5 to 5G, is it fair to say that now the timing of the 5G-related demand is more visible for you to target or it's still you believe that we do not have a color on the same?
Yes. So I think -- so Sandeep first question, the deals are both of consolidating and transforming the existing spend on the OpEx side, which always -- the deals are never -- let me not say never, but are seldom created for consolidating vendors. The deal wins that we have had, one of the largest we've had last quarter is built around transforming the existing operations by leveraging digital and automation. In the process, we have ended up consolidating a whole host of vendors -- many vendors and some of them are large companies, some of them are small companies. So that's always part of the feature. So it's not -- in many ways, not a new dollar, it is the same dollar, but that is being repurposed for helping the service providers become better at what they do. And then the other kind of deals that we have done, including the one I was alluding to earlier, in Asia, which is a new CapEx dollar that we are enjoying being part of, which is helping them put a completely new digital platform together. So that they can do their transactions and their customer interactions on a new platform, which will enable them to provide products and services in a very digital web scale type fashion. Now that's a new spend. It's a new budget that they have allocated in this case. So we are seeing a pattern of both. You're absolutely right that the service -- the rate at which the data is growing in the industry, which is very high, is not commensurate with the rate of revenue growth at this point in time. So the service providers are continuously exploring possibilities and opportunities to remodel their business plans, which hopefully will happen with 5G and beyond. But at this point in time, we are there because our relationship with the accounts continue to remain very, very deep. On your second question, look, I still think it is 2 quarters ago, if you recall, that C. P. had said that 5G is not going to be like 4G or 3G. It's going to be very nonuniform. We continue to see that pattern. We will -- different markets will -- and within different markets different operators will take different approaches. And that story has still not been completely written, it is still getting evolved. So I don't believe that we really know all the answers to how the revenues will shape up in that business. It is still -- we'll still need a couple of quarters to get a better definitive idea on that.
Okay, okay. Just follow-up, Manish. As you said that the final year is also similar to what you have seen in the order book. Is it fair to say that the Y-o-Y growth in the order book in the telecom is actually likely to improve and continue to inch up going forward? And for you to have a growth momentum continue may not be just in the near term but may also over a medium to longer term because these are all transformational changes which are coming. Is it a fair way of looking at it in terms of communication growth visibility for Tech Mahindra?
All I can say is, Sandeep, it is a fair way to set that expectation of us. And I can assure you that we are going to strive for that.
Okay, okay, Okay. Just last thing, Manoj, I just want to -- like, last time we said that we will achieve flat to low single-digit kind of growth in the telecom as a whole. So even at the current run rate, that may require close to a 4% compounded Q-o-Q growth rate. So are we still at the lower end, flat growth kind of estimate is still visible for you, Manoj?
No, I just answered that question, right. So we are seeing growth, whether it's 3%, 4%, 5%, is a different matter. And I think the range of possibilities includes flat to low single-digit growth, even now, right. So I think we'll have to see. There are, as Manish also mentioned in his answer, there are some external factors in terms of how this deals convert into revenue and how does the funnel convert into revenue or the deal. We'll have to see how it goes because I think if I look at the funnel, if I look at everything else, that's going very well today, yes.
Okay, Okay. And just last, Manoj. On the margins on the gross margin level, at 34% gross margin, it's at a multi-quarter high. So do you believe that these kind of gross margin are sustainable ex of currency going forward, looking at some of the supply side issues which are coming? And we also have a bit of a client concentration where a bit of a deal renewal leads to a dampener in terms of our gross margin. So how well prepared we are in terms of maintaining or defending such kind of gross margin level, because that will help you in terms of a margin consistency going forward.
So I would like to restrict my answer to EBITDA, and as I mentioned before, we do see gradual increase in EBITDA. Obviously, there are risks to this, as with everything else, and we will monitor the situation. But if I look at the combination of our investment and return on investments as well as our overall efficiency in terms of SG&A as well as the gross margins and as our digital business is increasing, I think there are pulls and pressures. But I think our broader view is that EBITDA margins will gradually improve at least over the next 2 quarters, and then we'll see, right, as time goes along.
We will take the last question from the line of Rishi Jhunjhunwala from IIFL.
Just a quick question, again on HCI. So basically, what was the impact on the margins from this $40 million revenue decline that we saw? And also, is it the bottom in terms of the revenue level that we could possibly see on an annualized basis or -- and would there be a sequential pickup as a result?
I think this is the bottom is what we believe. Second is, in terms of margin impacts, see, most of these are flexi staffing or flexi employees. And obviously, the system there works that it is proactively managing those. So the margin impact has not been very severe. And also, it has been cushioned, I said that, by the replacement of that revenue with higher margin revenue, which is also including offshore revenue. So that's the way to look at margins without going into the specifics of HCI quarter-on-quarter margin movement, yes.
Okay. So the reason why ask is that because if we really look at your difference between consol and standalone in terms of margins, EBITDA margins have been going down for the past 2 quarters, whereas, on consol level, it's been expanding. So just wondering if profitability of your subsidiaries are worsening in the past 2 quarters?
This quarter, if you look at the subsidiary versus consol difference, I think that is because of certain dividends paid out during the quarter, I thought, right. So because there's a large number in the subsidiary column, right.
Okay. That comes into EBITDA?
Yes, one second, let me pull that up. Where are you referring this from? Sorry, I -- maybe I am looking at the wrong number.
It's just the difference between your consol and standalone numbers, so subsidiary financials give a EBITDA margin decline.
Standalone has the impact of dividend income, right. So...
On EBITDA margins side?
EBITDA margin? How are you calculating that? Actually, why don't we connect off-line because I think -- let's talk through it. Broadly, the way I look at it is that I think, if I take a longer-term picture, I think both margins have improved, both standalone as well as the subsidiary margins. I think quarter-on-quarter, there might be fluctuations here and there, right.
So let me just rephrase, do you have headroom on improving your subsidiaries profitability as well in a meaningful way, because it has been quite weaker in the past 2 years?
And that's what I was answering in response to a previous question that I do believe there is still an opportunity, which will play out in terms of overall subsidiary margins going up, yes.
That was the last question. I now hand the conference over to Mr. Manoj Bhat for closing comments.
Thank you, everyone, for joining our call. I know that there are some people in the queue who could not answer the -- who could not ask their questions. So if you could e-mail it across to us, we'll try and get them answered. Thank you so much for joining.
Thank you. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.