Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani. MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

[Chander Prakash Gurnani, MD, CEO & Director]

Thank you. Good evening, good morning, and welcome to Tech Mahindra Q2 FY '21 results. Thank you for joining us today. I do know that on this particular day, I have to take you back to the previous quarter when I had spoken to all of you and said, there are 3 phases this organization would work and look at how we grow together. The internal teams have come up with 3 phases, with that we imagine value and rise. And I put forward, we imagine and I use the word repair. And that's what I've communicated to you before value and rise. Because to me, it's very, very important that we all realize that our own margin was a lot lower than what the industry feels for [indiscernible]. And we are not saying that we are collaborating with you today. We're just celebrating that the trajectory is right.Similarly, our growth has slowed down, and we had to repurpose the engine. The third part was that we had clearly decided that we will focus on cash flow. We will focus on investments for the future. And we will repurpose the way our capital is allocated. So the basic principles of repair, value and rise, the 5 vectors growth, profitability, investments of future, capital allocation and cash flow management, I think we've done well on all the 5 vectors. We clearly believe that some of the disciplinary actions that we took, I shared with you that the company has internally allocated more than 40 data [indiscernible] to work with our transformation of it. I think that discipline, that focus on data sciences and being able to take corrective actions online have worked reasonably well for this company. I genuinely feel very happy that we have been able to improve our EBIT margins by 410 basis points. And we believe that our strategy on profit improvement, there are still operating levers, which we need to work on. I'm also very happy on the growth side that our strategy to work not only with our customers, but to also focus on some of our partners has worked well. We have seen AWS and Tech Mahindra announcing a blockchain [indiscernible] solution, Microsoft and Tech Mahindra announcing our Microsoft business unit, our strategic alliance with Google and overall, a very, very deep alliance with [indiscernible]. So those are what we have actually reaffirmed the way we are going to the market with some of our partners. Rakuten -- the CEO and the founder of Rakuten personally came for the press conference before his own 5G rollout and acknowledged the role of Tech Mahindra in developing technology and being able to set up centers of excellence and also creating an alliance where both of us will actually do well, not only on the product side, but also on the services side. I actually complemented my team, your team on the cash flow management. To me, cash flow management is also in a area, in a time when most of us are not meeting the time. It was an important playback. It was an important feedback that, while the work is going on, are you happy with my work, will you support me by giving me cash a little earlier than we used to. And as you would have seen, our DSO days have done well. So your company continues to be focused on all those 5 parameters, but that is not all. We have always prided ourselves on 3 things. There is no business transformation, if there is no people transformation. So I think the company continues to focus on upselling, upselling as a service, making people more relevant and the people transformation is all about delivering value to the employees to be able to work through their potential. I think as a strategy, that seems to have worked very well. We are also very proud of our culture that we are a company which is passionate, but it's combined with the purpose. The purpose of leaving this world a better place can be inherited making the company a lot more environment friendly. Our ESG team continue to beat and be better than the best in the industry. We benchmark our [indiscernible] with the best in both industry, and we have done extremely well of every recognition that is possible on ESG. Our CSR team continues to be a strong partner in most of the locations that we operate from, whether it is [indiscernible] or whether is dollar or as much in Philippines or in India. So again, very, very proud of the CSR team because, I mean, and their purpose of focusing on health, health professionals, educating and smart centers by creating employment for the local teams, I think it is yielding results. On the technology side, your company has now drawn up a map under our CTO, and the map takes into account the short-term goals which is AI Plus, Cloud Plus, 5G Plus. At the same time, long-term goal of sales technologies on computing. So the company is that focusing on innovation as a [indiscernible] but more importantly, on some of the key game-changing technologies. So while we know it's going to be a difficult, long, uneven long year centers as I have commented in terms of economies. We do know that the extend continues to be an integral part of every budget. We do know that we are a company with our partners and with our own urgency to work on all the 5 vectors will continue to yield good results. And I am confident that we will maintain the trajectory of growth and profitability. I'm going to request Manoj, our CFO, to share a little more details on our financials.

[Manoj Bhat, Chief Financial Officer]

Thank you, C.P. I think quickly through -- running through some of the financial parameters. If you look at revenue growth of about 4.8%, 2.9% in CC terms, I think the 2.9% is almost equally divided between the supply side and the demand side. Some of it came back because in Q1, we had constraints because of some of our other business lines not being able to operate. We've seen some of that come back. And of course, the demand side recovery, C.P. also alluded to it, there is increased momentum. From a vertical perspective, also, I think we saw growth across multiple verticals. And 1 of the things which we had mentioned that we do believe manufacturing will bottom out and that also happened in this quarter overall. Although it is just about flat in repotted currency. The other element of conversion of the funnel, I think at $421 million, we are back to almost previous levels. I think in terms of color on deal sizes, I think the deal sizes have been a larger number of deals, but more medium-sized deals, so which I think is a good sign that across multiple engagements we have converting. And that kind of adds to the theory that I think this is something which we are seeing across multiple verticals. I think coming to margin improvements of 410 BPS improvement in EBIT margins, I think supply and demand side recovery was each about 160 BPS during the -- totally about 160 BPS while cost management, which meant off-shoring, which meant utilization, which meant result reductions in Satyam, et cetera, was another 160 BPS. We also had 70 BPS come from normalization of the seasonality because Q1 is a seasonally weak quarter in our mobility business as well as visa cost is absent. All in all, as C.P. also mentioned, I think it's been a strong recovery. The other side, if I go down below the EBIT line, we had a ForEx loss of $5 million versus a gain of $11 million in the last quarter, mainly due to translation losses due to the weaker dollar. Miscellaneous income was lower because we had some one times. One was the sale of the subsidiary in [Indiscernible], the second was the interest of the large tax refund, which we had received, which are not there in this quarter. Coming to the cash side of things, we have a cash balance of about $1.57 billion. Cash flow generation. Free cash flow for the quarter was about $236 million, which is second highest ever then and our DSO at 97 days is the lowest in 15 quarters. And this has, again, been a good performance across geographies, across customers, across verticals. In connection with that and keeping in mind what we have talked about in terms of capital allocation, I think we have announced a dividend of INR 15 per share. And I think that's what the team is committed to that as and when we get an opportunity, we will try to see how much maximum of excess cash we can return to the shareholders. I think apart from that, our hedge book stood at $2.4 billion, which is booked at pretty healthy rates. I think that data is there in the fact sheet. Summarizing all this, I think as we look at the future in terms of margin improvements, I think it's been a journey, which has been begun really well. I think, but there are a lot of other areas around synergy, around changing our operating model, and coupled with improving demand environment, I do believe in at least the same margins going forward, if not improve them. And that's something which we will try and see if we can offset all potential cost returning as they return through the quarters and still try to endeavor to try and sustain and improve margins going forward. With that, I'll throw the floor open for questions. Operator, back to you.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

So excellent execution once again. So C.P. I have only 1 or 2 small questions. First of all, if you see in this quarter, have excellent performance in spite of the fact that we have only 3 vertical firing in a big way. Other 3, although did well, but not as good as you know, technology banking and retail. So 1/3 of the overall business has done extremely well, and that has led to such a superb growth. So what is your sense on the balance of the vertical? When will they [ command ship in ]? That is number one. Related part to that will be that when do you see 5G actually finalize? I understand that it is some time away. But in the meantime, what will help us in the communication side? And the second question which I have is that how do you see this DSOs coming if you're down for the whole industry, generally, the sense which we get is there both ways to look at it. One is maybe to the lower growth in previous quarter and better collection this quarter. That could be one reason or it all [indiscernible] by the good health of the -- and also their intent to pay quickly and take more services in future or for making bigger spend. Is that a good correlation? Or do you think it's too much to think in that direction?

[Chander Prakash Gurnani, MD, CEO & Director]

Sandip, again, thank you. Thank you for your support. I'm going to actually do a good job of involving our management into this answer. So the DSO base can Manoj you take this off and Sandip's question on when do you see the other cylinders firing or other verticals for and what we use look at communications and 5G. I will let Jagdish and Manish Vyas answer it. So Manoj, do you want to lead please?

[Manoj Bhat, Chief Financial Officer]

yes. Thank you, C.P. So I think if we look at the DSO part of it, clearly, some of it is contributing because there's a reduced working capital need which has happened because of the declines we have seen. But more importantly, what I see is across customers. I think if I go back to Q1, I think one of the things we were thinking about is whether we will see actually an elongation in collection period. And frankly speaking, I think we have seen across the board, customers are more than willing to help in terms of payments, I think we have seen internal results also help in terms of that awareness, that communication that this is something which is very, very important in these couple times. So to me, I think it demonstrates that many of the services we are doing are very, very essential to our customers. And combined with a more heightened awareness internally, I think that is what has driven some of these results. As we go forward, as the revenue growth comes back, maybe some working capital increases will be there. But I'm hoping that the awareness and some of the process changes we have made internally. I think that will stay. But definitely, I think as revenue growth goes up, we will see working capital increases happen. So that's a quick 1 on DSO. And Manish, I'll hand it back to you to talk about communications and how do you see that evolving?

[Manish Vyas]

Absolutely, Manoj, thank you. Sandip, thank you so much for your question. I think I'll put it this way. We did have a lot of reversals in quarter 1, largely because of the impact of the decisions that the service providers had to take, they were suppose to take in terms of network rollouts as well as their ability to enable, in time, the call center and the customer experience work. At the same time, some of the discretionary spends also were pulled back. What we have seen this quarter, however, on a different note, is we have almost doubled the size of the number of new deals that we have signed in Q2 as compared to Q1. Number one. Number two, the funnel across a broad range of transformation areas does look pretty decent right now. We are talking about helping service providers transform their entire 5G stack on the process and systems side, leading up to subscriber management to the B2B use case management all the way down to OSS. And of course, we continue to assist customers. I mean, this is not scaled as much, and honestly, we don't know whether that is a 2021 feature or will continue to lag a bit. Depending on how the overall economy for the B2B business, particularly sales or for the service providers. I want to go back and remind you all that one reason why all of us were initially surprised, not as though, is that the service providers will see some pressures due to COVID was largely because the B2B business was going to get impacted, and it did. So that said, today, where we are with the overall holistic transformation of service providers, 5G and even beyond, I think we are looking at some active times in the next 3 to 9 months. In terms of the kind of business we will do in both networks as well as all the core digital transformation. So I would say, watch out for this space, I'm quite optimistic that our funnel indicates that the discussions are at an advanced stages across multiple accounts and multiple geographies. And it is going to be, I think way back, we have said that 5G is not just a 1-rig pony. 5G is an opportunity for service providers to relook at everything from process to operations to systems to, of course, the network architecture. And hence, it's not just one part of 5G that we need to watch out for. I think it will be a combination of several of those things. So I would say that we are quite busy addressing these needs at this point over the next several quarters. Manoj, over to you.

[Manoj Bhat, Chief Financial Officer]

Jagdish?

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

Sure. Sandip, thanks for the question. So let me -- I'm just answering your questions around the verticals beyond the ones that fired this quarter. And also a good segue from what Manish mentioned on 5G is the traction we have seen on the noncommunication side of the verticals. I think it's too early to say that it was really -- the pickup is very high. But at least, we should be able to tell you that this quarter, for example, we signed up just in the manufacturing sector, 3 solutions. They are no -- by no means large deal, but they're 3 solution. In Europe and 1 in U.S. products sold enterprise put together a 5G solution as being constructed and the applications on top of it. So it's starting to move in the right direction, and I think our investment and development in this, and we'll hear more about it as we start to get into the quarter, if we will continue to drive this channel of IT, a cross between communications as well as in the enterprise side of the business. As far as the other verticals are concerned, obviously, the first vertical that we are focused on to revive and bring the growth package manufacturing. And I think this quarter, primarily the manufacturing was slightly above quarter -- last quarter. So it bottomed out to a large extent, and we will start to see growth in this. And growth across primarily being driven by engineering services in our auto sector, which had slowed down. So a lot of the projects that got deferred, and those -- that business across [indiscernible], across ED, across ADAS, all of these are coming down. Even industrial on B2B is coming back. So we expect both in U.S. and Europe our Q3 to look quite positive on manufacturing and come back on the growth part. The retail segment, which is our next vertical that we look at as something that we look at the opportunity to grow. I think the COVID has exposed a lot of opportunities in digital in retail, primarily around omni-channel, omni-commerce where we and our [indiscernible] streams primary as a service will indeed have started to engage with our customers. It's fair to sort of segment it in 2 blocks. One is the e-commerce kind of segment. And which is obviously showing growth. The online segment. And then there are the fixed retail businesses that are obviously in a hurry to move towards the online world. There we have quite a few of our customers who are starting to move towards enabling their supply chain and online, not just omni-channel but omni-commerce solution. And we have a fairly large business in the CPG segment. It has done reasonably well, and we think that will continue to show robust growth. So all in all, next quarter onwards, Sandip, you should start to see growth in a significant way both in manufacturing as well as in retail?

[Operator]

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

[Pankaj Kapoor, Research Analyst]

So Manoj, if I look at your special dividend and if I assume that your regular dividends should be similar to what you paid last year, we are looking at almost anywhere between 60% to 70% of payout. So just wanted your thoughts, in terms of, do you see this is a sustainable level of payout that you would like to probably move with? Any kind of a concentration as you can do there as a base? And second, what was the process of deciding between a special dividend versus money back?

[Manoj Bhat, Chief Financial Officer]

I think, Pankaj, I'll take the second one first. I think what we did was a very simple thing, looking at our profile of our -- all the shareholders. And said what is the least -- or the most effective way of returning money, considering whether tax is paid in the hands of the company, or of the individuals. And for us, the result came out as a dividend. And that's the decision we took. I think to your second point, I think, obviously, the final decision -- dividend decision is a different decision, which we'll take later. But we have always maintained the goal of the management team to return excess cash after reasonable investments, which historically have been about 30% or so, 30% to 35%, or so of in terms of M&A dollars and other investments. And I think to me, that's something which we'll keep evaluating as things go on, but we have not formally put out a number, but that's what I can say at this moment. Yes.

[Pankaj Kapoor, Research Analyst]

And my second question actually on your margin [indiscernible] in the current quarter. But do you think is a kind of supply side requirements, which are coming up, many of your peers have announced VSIs, et cetera. So going forward, how do you see these levels sustaining given the headwinds from potential rate hikes?

[Manoj Bhat, Chief Financial Officer]

So Pankaj, that's what I tried to cover in my opening comments. So I think there are 2 or 3 things here. So from a demand recovery perspective, I think that is going to create its own beneficial impact on margins as we go forward. And already in this quarter, we have seen some of that happen. I think if I look at the other side of the equation, whether it is our journey towards a more global delivery, including more offshore because clearly, some of the trends there are very encouraging, and we have started the journey. The second thing is the synergy component with all our portfolio companies and I talked about last quarter also that it is a synergy both from a revenue perspective as well as from back end perspective, whether it's terms, whether it is people, whether it is functions and processes being integrated. I think we should see some of that come through as we go forward. And lastly, I think from overall automation and reduction of subcontractors. Even now, I think we have about 13% of our revenues coming from Satyam and this ties back into some of the things I spoke about in terms of the larger deals and how they start normalizing. Whatever took away the margins is going to contribute beneficially as we go forward. And on the other side, you have the to potentially have some of the parts returning in terms of gradually travel costs potentially some of the variable tail elements, et cetera. So I think that's the balance. Considering all of this on balance, I do believe it's sustainable, and it -- it will be our goal to actually see how we can improve it further.

[Operator]

The next question is from the line of Rishit Parikh from Nomura.

[Rishit Parikh, Associate]

I just wanted to understand a couple of them in terms of furloughs in the third quarter, given I think most of our peers have indicated slightly higher than normal. And what are we seeing from a seasonality benefit that we get in retail? So that's the first. And second on the contact center BPO, in our call they were sort of indicating that contact center BPO lightly weaker demand. And given that's a significant portion of our business in the BPO. I wanted to get your views on what are you seeing demand in that space?

[Manoj Bhat, Chief Financial Officer]

Right. So on the retail and BPO, I invite Ritesh to speak, a quick word on furlough before I hand it over to him. So from our perspective, of course, the real risk is that there could be an increase furlough, there's no doubt about it. But as of now, there's no -- no such indication from any of our customers or in any of our conversations. But as we are thinking about planning for the quarter, I think we are keeping that in mind that this could be a possibility. And we'll never see how it goes. But there is no such indication, and we are today on 23 October. So but that's something to keep in mind for sure. I know that's not a definitive answer, but it is definitely something we are closely monitoring. I think going back to retail ramp and how we see it play out as well as the contact center piece of it. I think I'll invite Ritesh, Ritesh, if you can take those 2 questions.

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

Sure. Thanks, Manoj. And Rishit thanks for your question. As you've seen from the numbers, the quarter that went by was extremely strong from the BPO standpoint, where we grew at upwards of 30% quarter-on-quarter. And some of it was reflective of how Q1 was where we were impacted both on the supply and demand side. As you rightly said, a significant part of our business is on the customer experience side, the current office transformation piece itself. What I'm particularly encouraged with is the fact that our core value proposition has continued to remain intact. If anything, it has only gotten reinforce through the pandemic. What we have seen is a greater acceleration in organizations transforming themselves digitally, their customer experiences content center of boardroom priority. And COVID-19, if anything else, has been the single-digit catalyst of continued transformation and what we have seen done, particularly in the last 2 quarters is more than what most clients would do over 3 to 4 years. So our core value proposition of cannibalizing our business through extreme automation, AI and analytics. And delivering to superior business outcomes, continues to get reinforced. And if anything else, that has only gotten validated. What I'm also encouraged with is the fact that we've been able to differentiate our core offerings in the marketplace out here. To take share away from competition. To the other question, which is related to the retail side, what we have seen, particularly in the last quarter that went by as well as in the current quarter. We have seen a significant demand from some of our client base on the retail side as they have been able to successfully compete in the marketplace. And I do think the fact that there is going to be a demarcation between what I call is good retail and bad retail. The folks who have successfully managed to transition to an online channels from a competitiveness standpoint are obviously standing all and pretty. And we are fortunate to partner with several of them. So as they grow, we benefit from the growth that they have. So that seasonality benefits us as they continue to get ready for the holiday season. And as more and more consumers like you and me, look to shop online, we hope that we can benefit from that trend as well.

[Rishit Parikh, Associate]

Okay. And Manoj, just one small follow up, right? You mentioned increase in variables there, right? So there's no broad level of rate hikes that we're planning to give out this year. Is that the correct understanding?

[Manoj Bhat, Chief Financial Officer]

Are you saying about this year?

[Rishit Parikh, Associate]

Yes, this year, yes.

[Manoj Bhat, Chief Financial Officer]

This calendar, we are not planning anything. I think whatever decisions will be in the next calendar year. And that's something we have to take.

[Operator]

The next question is from the line of Abhishek Bandari from Macquarie.

[Abhishek Bhandari, Analyst]

Manoj, I have 2 questions for you. Number one, first part, you book any other income from the sale of [Indiscernible]

[Manoj Bhat, Chief Financial Officer]

We have looked at in [Indiscernible], so not in the levels above. So we had chosen an accounting treatment at that point, which was showing it in kind of the equity block. And so this this gain, if you see the whole, you'll see that increase of amount give or take $30 million.

[Abhishek Bhandari, Analyst]

Okay. Got it. Second question is on the headcount. So if I look at the software professional headcount and the sales in support staff, they feel to have come down sequentially, and most of the addition has happened on BPO. And we are also touching kind of 85% utilization level. So if you could help us to how these numbers are going to move forward and what would be a hiring plans for Q3 and Q4?

[Manoj Bhat, Chief Financial Officer]

No, no, from our perspective, and we never give our hiring plans. So I don't think we're starting that. But so from our perspective, the way to look at it is that I think as we have gone through this journey, there is going to be an optimization, which is led by filtration vaccine being controlled and so that's something which has happened. I don't believe utilization will go much about this. So if you probably stay at this level. So from that perspective, that lever is something which I don't believe will play out too much. I think it's -- the second thing is, I think we are looking at structurally in terms of models where we are trying to hire people again. And so you will probably see a headcount increase going into the next 2 quarters. But I don't have definitive numbers for you. We are also instituting a plan to figure out program with some of the cash, et cetera, going into probably Q4 or Q1. So I think all of those activities are happening on the manpower side. But this has been an environment where we are looking at every requirement and every opportunity to see how do we restructure our delivery organization and make sure that we are delivering at an optimum level with the right number of resources. And that will change as we see more growth come in the future quarters, yes.

[Operator]

The next question is from the line of Sandeep Shah from Equitas Securities.

[Unknown Analyst]

Yes just wanted to understand, if I look at the growth profile in this quarter, significant portion of the growth has been driven through BPO services. With non BPO, which to the IT services, the growth is less than 1% in CC terms. So it's been perceived that are we not participating enough in terms of digital LED services especially outside the BPO and why we are not able to drive the growth when the whole vendor profile. Has been indicating that the growth has been increasing on cloud adoption, data, digital analytics kind of services why we are not able to show that in our growth journey?

[Manoj Bhat, Chief Financial Officer]

Sandeep, that's a good question. So if I really look at it, and I think in the first question, is and somebody said that some of our verticals are not doing as well. But if I really want to talk about 3 areas, and then I'll request maybe Manish and Jagdish to check. I think 1 is, of course, the network services revival is lower than we thought. So that's something which I think as and when the whole equation around 5G, et cetera, starts looking up and things will start going back to normal. The second is ARUP as a geography, if you see, has been slower in terms of the bounce back, while U.S. and ROW. So I think even that, I think it's a quarter or 2 that is what I see that should come back. And the third piece is from a vertical perspective, I would probably talk about manufacturing. I think these are 3 specific areas, but I'll request Manish to speak for a few minutes and then maybe Jagdish you can add to that, yes.

[Manish Vyas]

Sure. Thank you. Sandeep, thank you for the question. Let me first allay your fears. That we are -- whether we are participating in the digital or overall transformation. The -- I want to assure you that, that is not the case. We are very busy, like I said in my opening answer to Sandip Agarwal's question that we are busy with a lot of digital transformation work around a broad range of topic, what you would consider and we would historically call as IP, our network our overall digital. So that's point 1. Point 2 is are typically being slow as far as their recoveries are concerned. And in terms of thing the new digital programs are concerned. Some of the work that happened in this quarter, including the launch of the new iconic, as most companies call it, the new has actually been built into the projects and the allocations that happened over the last 6 to 9 months. So that may you see revenue upside, but all of that work that we enable with almost the top 20 service providers was built around this digital transformation. So that's point two, point 3 is, I think you will continue to see as the year -- the calendar year winds down, some of these decisions happening. The revenue detail of that may happen a little later. But at least you will start seeing some decisions happening because people will take those calls as the debt prepared for the next year. So I think it is very similar to the first question I answered as far as telecom and comms is concerned. We continue to participate and stay very busy with the transformation and digital. As far as converting that into the upside, I think it's -- sometimes it's always a function of time, and there's always a lag here and there. But to Manoj's point, we will start seeing -- we didn't have -- we had a lot of muted activity in Europe for a period of time. We are starting to see a lot of interns work or going on in that geography as well.

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

Thanks, Manish. This is Jagdish. Sandeep, so to give you a little more color from the additional part that maybe Manoj and Manish covered, I'm not going to repeat it, it holds true for the rest of the business. But just on the comments on digital, just on data, I know we've stopped reporting or commenting on what our digital growth has been. But just on a quarter-on-quarter basis, our digital growth will be upwards of 10% to 15% in terms of the digital technology and the growth that we've shown this quarter.The question is, why is it not resulting in an IT, services, larger growth at large. And that's driven by 2 or 3 things apart from what Manoj and Manish talked about. One is these couple of verticals that need to pick up for us, and they are already from an industry perspective, have shown a good play, they were talked about, both manufacturing and retail.Actually, even utility from that perspective is showing good signs of growth for us. So this quarter, I don't think is a mix of our -- the structural mix of our business is what's played out. And I think going ahead, this will start to play out pretty much in line with what the industry [indiscernible]. So you should expect a better performance from IT as we go through the next 3 quarters.

[Sandeep Shah, Vice President]

Okay. Okay. Just a follow-up to Manish. I think in his initial reply to a question you said in next 3 to 9 months, there would be traction on network and core digital transformation-led deals. So these are large-sized deals? Or these are the smaller-sized deals? And Manoj, can you clarify to your earlier question, why there is a significant decline in sales and support staff in this quarter?

[Manish Vyas]

Yes. I think Sandeep, very quickly, it's a broad range in the sense it is mix size as well as large-ish size of deals at this point, depending on the kind of operators and service providers who are looking to participate in the transformation. It varies in terms of their respective size. But irrespective, what is important from a trend standpoint and to give you the assurance that, and I'm particularly focusing on your first question, that for every major operator that we serve today, we are busy with doing digital transformation or transformation discussions per se.

[Sandeep Shah, Vice President]

Okay. And just on sales and support staff question.

[Manoj Bhat, Chief Financial Officer]

I think there is some reclass there. So I don't think you should read much into this. What we will do is we'll try to represent it differently. I think that's just the reclass.

[Operator]

The next question is from the line of Girish Pai from Nirmal Bang.

[Girish Pai, Head of Research]

Had a few questions on 5G. How much of your pipeline is 5G-oriented? The second is, in terms of systems integration opportunity in 5G, suppose $100 is the investment going into 5G, how much of that would be systems integration driven? And the narrative around 5G, which has been thus far B2B, it is going to be like spread out over multiple years, has that narrative changed because of the pandemic? These 3 questions.

[Manoj Bhat, Chief Financial Officer]

Manish?

[Manish Vyas]

Absolutely, great -- Girish, great questions. So let me go back to the overall 5G narrative that we have been giving over the last several quarters that 5G is not just about putting the new radio network, which clearly is one large CapEx area that we are -- we will see, but 5G is an opportunity and most of the action that we have seen, it kind of vindicates our position that 5G is a more holistic transformation at multiple levels: operations, process and systems and of course, network. So large part of our funnel today, I may not be able to point you to a specific percentage off-line, but will request maybe Kaustubh to look into it, if that's something can be shared. But a very large part of our funnel -- when I use the word transformation these days, you can pretty much interchangeably use 5G or digital transformation in the same breadth. That's indeed around either 5G or 5G enablement, right? For example, if somebody wants to deploy a new billing system, it is indeed keeping in mind whether that system is going to be able to serve the 5G use cases. And to your second question there about whether it is still largely a B2B or it has evolved with COVID. I think it's both. It still continues to stay largely B2B, primarily because -- and like Jagdish pointed out, that's where we are seeing a lot more interest from our enterprise customers around 5G discussions right now. In one of our recent advisory meetings with the customers, unanimously, everybody voted for saying we would like to be busy in discussions with you all on 5G, but you are right that COVID has indeed presented some new challenges and opportunities. Challenges around the fact that there is a lot more remote working, home office working for enterprises. People expect that to continue, not just for a short term, but maybe in many cases permanently. So the current broadband solutions are serving their purposes quite all right. But clearly, there is going to be intense pressure as the data traffic shifts more towards video and multiple screens and lot more industrial activity happens outside of these remote locations. So there are discussions happening not just around use cases, but around security infrastructure, around private networks and few other things. But again, early days on all of these things, if you open up any newspaper, any magazine in the industry, almost everybody is talking about these things. The gap between the high cycle versus the conversion of these opportunities, I think, is something which nobody can specifically accurately predict. However, needless to say that there is a shift happening. The trend is shifting around how the 5G will be deployed and will be utilized going forward.But again, just to summarize, I think 5G is indeed a very central theme in almost all our conversations in our funnel today. I would also add, including where we are discussing only costs, the prime driver for that is also how they want to deploy their remaining money on 5G. So either we are enabling or we are actually in the heart of that 5G conversation at this time. I guess that helps, Girish.

[Girish Pai, Head of Research]

Yes. One last question. What is the opportunity around this Rakuten communication platform, that's one. The other question I had, which it had asked earlier was out of $100 spent on 5G, how much of that will be systems integration oriented?

[Manish Vyas]

Yes. So again, I think the system integration piece in 5G. And again, I will have to go back to the same point that 5G, if you just look at network, RAN, that's one piece. But if you look at the overall 5G, there are different cuts towards a typical project.I would still say about 30% to 35% to 40% depending on an average is going to be the system integration. It will only increase over a period of time as the open architectures become more mainstream. A lot of that conversation has begun. That brings me to your second question about Rakuten. It indeed is an opportunity to spearhead with them and few other similar partners the whole open architecture, cloud-native, software-based architecture in the network, plus domain. It is not just network. It is also everything that can be done for a service provider and for their customers that is cloud native. So I think it's a significant move in the industry. Still early days as far as Rakuten Cloud Platform is concerned. But our overall partnership with Rakuten, as C.P. alluded to in his opening remarks and as we have publicly announced, I think we have cemented that relationship even more at multiple levels. So I think it's the lead indicator of what the thought leaders in the industry are talking about in terms of how a future telco architecture will be built. And your company is not just happy, but also we believe we are privileged as the leaders in this industry that people come and talk to us across a broad range of partners, not just Rakuten.

[Operator]

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

[Diviya Nagarajan, Executive Director and Research Analyst]

Two questions here. First to Manoj. You had earlier talked about, over time, getting back to this 15% kind of EBIT target by the end of the year. Given that we're pretty close to this, but there are definitely some additional cost savings that have come in because of the current environment, should we be looking at any upside risk to that 15% number? That's my first question.

[Manoj Bhat, Chief Financial Officer]

So Diviya, I think clearly, the current quarter, of course, has created a [indiscernible] effect of some of the things we thought will take 2 or 3 quarters. Having said that, I think for now, I would like to maintain the 15% and potentially with an upward bias. But I think that's something we'll have to wait, and which I said in the past also, by Q4, we want to give you a clear visibility into next year. But considering our performance this quarter, I would think that there should be an upward bias there. But I'll wait till Q4 before I -- we are more definitive about that.

[Diviya Nagarajan, Executive Director and Research Analyst]

And I'm not sure if [indiscernible] the call. So this is more a medium-term revenue outlook question. What according to you gets Tech Mahindra to a more comfortable double-digit kind of a growth rate? Would it come from the kind of large deals that we saw last year, those $1 billion -- almost $1 billion kind of contracts? Or can existing businesses serve kind of that -- perform at a much faster run rate? What should we look at as lead indicators for accelerated revenue growth?

[Manoj Bhat, Chief Financial Officer]

So if I really look at it, 2 or 3 components, Diviya. So the first one is, if I look at our enterprise business, I think even in the past, we have been at the industry-leading levels in terms of growth. And that's something which I don't see a reason why we should not reach that level. Couple -- add on top of that some of the breakthrough large deals which we won last year, even in the enterprise side, I think that will cause a growth acceleration. I think on the telecom side, I think, clearly, in addition to whatever we are doing in terms of helping telcos transform potentially on the IT side and combining some of the digital technologies, I also see that whole 5G as an additional lever. So if I assume that is a 2- to 3-year cycle, which continues. And this is an -- and I mean overlay with the broader things which we have seen across customers in terms of a drive to be more digital, and that's where I do see that accelerated growth comes from.Now of course, for all of this, we have to execute in each of these buckets very, very well. But if I step back and look at the funnel, again, it is almost at an all-time high. There is a lot of deals in the pipeline. And we need to fix each one of them, analyze and win those deals and execute. But that's the way I would see the accelerated growth come through.

[Diviya Nagarajan, Executive Director and Research Analyst]

Got it. And just as a follow-up to that, what is your confidence level on 5G growth picking up next year? I think we've had these expectations be there for some time now, but has anything given you increased confidence that we are much closer to this than we've been in the past? And if yes, what would that be?

[Manoj Bhat, Chief Financial Officer]

So I'll let Manish answer it, but I mean, we have always said that this will be an F'22 phenomena, but clearly 2 months have passed since -- 2 or 3 months have passed since we said that. So Manish, you have a perspective on timing. I know it's kind of a difficult [Indiscernible] call...

[Manish Vyas]

Diviya, I think timing is -- Diviya, timing is always the difficult part. However, I'll just try and provide more color to where are we sensing the opportunities coming from and what is it that is driving this. And Manoj [ just said ], this could be sometime next year, next financial year, the one after. The -- what is happening clearly is that COVID has demonstrated not only from fault lines in the business because it is an ironic fact that while the consumption of data is at an all-time high, a major part of the network, and yet the revenues and the margins have continued to remain reasonably muted for the service provider. That does put -- and that's not new. It is ironic because it continues even in this time of crisis. When the initial commentary, if you recall, the first couple of weeks of the pandemic was that maybe the telco industry will benefit a lot more. But we knew that the B2B impact is going to be significant. So that has been one, I would say, negative impact on the speed at which they would be investing in the B2B -- sorry, in the 5G cycle.But I think, Sandeep or Girish asked this question earlier, which was important, what will be the impact on B2C. And that, I think, is where we will start seeing at least an expansion of projects to serve the consumers, a lot of the work that Ritesh was alluding to earlier, also is an indication that some of the new discussions that we have begun is actually not on the network, not on the IT side, but by leveraging new technologies like AI, ML into our customer experience segment because many a pundit have said that the transformation of customer experience is directly proportional to the 5G revenue growth for service providers because it's about recasting the relationship between a service provider and their consumer store customers. So because the conversation has now started happening at multiple levels, not just at the network deployment level, that gives us the confidence that we are in the right place, right time at this point. How it manifests itself into deals and wins and revenue, it remains to be seen, but we remain cautiously optimistic.

[Operator]

We'll take the next question and the last question from the line of Jiten Doshi from ENAM AMC.

[Jiten H. Doshi, Founder and Chief Investment Officer]

C.P., Manoj, Jagdish, Manish, congratulations on a very good show. I think for the first time, we are getting to see a very strong momentum in the company. So the only thing I would request is, Manoj, I have made this mention sometime back to you also that I hope you all don't go and do one large acquisition and put yourself to the back. But I think the momentum seems to be very, very positive. And I think the company seems to be in the right direction. We always have more faith in you than you had in yourself. But I think this is just to say that we are on the right track, and I just hope the momentum is maintained. Because I think that's what gives all of us the joy. So just -- we hope that next couple of quarters just go this way and we see you back on growth. But ideally, my question always remains that what is the margin that you believe is possible in terms of the EBIT margin? Do you think we can go back to 18%, 20%?

[Manoj Bhat, Chief Financial Officer]

So Jiten, thank you for your comments, and as usual, they're well appreciated and understood. So from my perspective, I'm not going to put out a margin number. And what I said is I think it's the increment of 2 quarters at a time, 4 quarters at a time, and we build from there. And that's what we are saying that as -- by Q4, we will look at F '22 and look at whether we can exceed that 15%. But for now, I think to put all hands to the deck on achieving our next 2 quarter goals and then the next 2 quarter goals, and that's how we are approaching it.Unfortunately, C.P. had to sign off, but I'm sure he would have also appreciated your comments. So thank you so much for that, Jiten.

[Jiten H. Doshi, Founder and Chief Investment Officer]

So just one more thing that in your longer-term vision, what do you think is the sustainable growth? I mean, we are looking -- are we looking at a double-digit growth to sustain over the next 3 to 4 years?

[Manoj Bhat, Chief Financial Officer]

In my mind, if 5G comes and when 5G comes, and we think it will be next year, I think we will see both sides of the equation growing potentially close to that double-digit number, given what we are seeing in the marketplace today. So that's where I would think it would be. But that's the vision we have, trying to build to that kind of a company. And that's something which I think we are not taking it as a 6-quarter thing. We are taking 2 quarters at a time, as I said, again, that we are all defining what is this quarter's goal, what is next quarter's goal. And then going about it step by step.

[Jiten H. Doshi, Founder and Chief Investment Officer]

So but the longer-term goal that you're still looking at is a sustainable double-digit growth over the next couple of years, right?

[Manoj Bhat, Chief Financial Officer]

I think that would be the goal, yes, overall. But as I said, I think many things have to fall in place, and we have to make them fall in place. That's what we are working towards.

[Jiten H. Doshi, Founder and Chief Investment Officer]

Fantastic. Wonderful. Just wondering what took you all so long because the team is fantastic, everything is right. The momentum has just started, and we wish you all the very best. Just stay the course, very, very focused. I'm sure you will surprise everybody. So all the very best to you. Thank you so much for a wonderful quarter.

[Manoj Bhat, Chief Financial Officer]

Thank you, Jiten.

[Operator]

Ladies and gentlemen, that will be the last question for today. I now hand the conference over to Mr. Manoj Bhat for closing comments. Thank you, and over to you, sir.

[Manoj Bhat, Chief Financial Officer]

Thank you, everyone, for joining in. I know maybe some people are still in the queue, but we are happy to answer questions offline. And thank you so much for joining, and I appreciate your feedback and comments. Thank you.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines.