Tech Mahindra Ltd

NSE:TECHM

Earnings Call Analysis

Tech Mahindra's Q2 FY25: Revenue Growth and Margin Expansion Amid Challenges

In Q2 FY25, Tech Mahindra reported a 2.2% year-over-year revenue growth to $1.589 billion, driven by strong performances in Europe and BFSI. Margins improved for the third consecutive quarter, reaching EBIT margins of 9.6%. New deal wins totaled $603 million, marking a strategic win in the communications sector. While telecommunications faced a decline, other sectors like healthcare and retail showed strength. Looking ahead, Tech Mahindra aims for consistent margin improvements and significant investments targeting FY27 goals. The Board approved an interim dividend of INR 15 per share based on robust cash flow generation.

Tech Mahindra's Q2 Performance Overview

In the second quarter of FY '25, Tech Mahindra reported a revenue of USD 1,589 million, reflecting a year-over-year growth of 2.2% and a sequential increase of 1.9%. Notably, growth varied significantly by region: Europe grew by 4.1% year-over-year, while the Americas saw a decline of 2%. The numbers highlight the company's ability to navigate a challenging global IT landscape.

Vertical Performance Highlights

The earnings call revealed mixed results across different verticals. The BFSI (Banking, Financial Services, and Insurance) sector experienced a healthy growth of 4.5% year-over-year. In contrast, the telecommunications vertical faced challenges, posting a decline of 1.7%. The manufacturing sector also struggled, with a meager growth of 0.6%, primarily due to reduced discretionary spending. However, sectors such as healthcare and life sciences saw increases of 4.5% year-over-year, reflecting positive momentum.

Deal Wins and Strategic Initiatives

Tech Mahindra secured Total Contract Value (TCV) deals worth USD 603 million in the quarter, with a broad-based distribution across various markets. Significant wins included two new logos from the U.S. and European clients, focusing on AI operations and core banking transformations. The company's strategic partnerships, especially a collaboration with Microsoft to modernize workplaces, align well with its future growth trajectory.

Fortius Project and Margin Expansion

The company's operational focus is encapsulated in Project Fortius, aimed at enhancing margins through improved efficiencies. For this quarter, the EBIT margin improved to 9.6% with operational improvements reflecting a 110 basis point expansion. The management emphasized that this initiative is critical for long-term margin enhancement, expecting the benefits to continue into the second half of FY '25.

Cash Flow and Dividend Strategy

Tech Mahindra generated a free cash flow of USD 157 million, translating to 105.4% of profit after tax (PAT). The company’s healthy cash position, with cash and cash equivalents of USD 784 million, allowed the board to declare an interim dividend of INR 15 per share. This commitment underscores a willingness to return value to shareholders while investing in growth.

Future Guidance and Market Outlook

Looking ahead, Tech Mahindra's management expressed confidence in sustaining growth in the upcoming quarters. They aim for an overall revenue growth rate in alignment with industry standards, estimating a requirement of TCV between USD 600 million and USD 800 million per quarter. The management's focus on margin stability suggests they are prioritizing profitability alongside growth, particularly in a volatile market.

Sector-Specific Challenges and Recovery Outlook

There are notable challenges within the telecommunications sector due to clients tightening budgets amid rising interest rates. However, the management anticipates that potential rate cuts may provide some relief to these clients and lead to an uptick in demand by CY '25. The management remains optimistic about stabilization in the U.S. market alongside growth in Asia-Pacific and Europe.

Final Thoughts and Transformation Commitment

In conclusion, Tech Mahindra is navigating a transition phase focused on strengthening client relationships while investing for future growth. The company's commitment to operational excellence through Project Fortius and proactive margin management is pivotal. Mohit Joshi, the CEO, expressed a dedication to long-term transformation, underlining optimism backed by strategic priorities set out earlier in the year.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q2 FY '25 Earnings Conference Call.

We have with us today Mr. Mohit Joshi, Chief Executive Officer and Managing Director, Tech Mahindra; and Mr. Rohit Anand, Chief Financial Officer, Tech Mahindra. [Operator Instructions] Please note that this conference is being recorded.

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

[Mohit Joshi, executive]

Hello, everyone, and thank you for joining us for our Q2 FY '25 earnings conference call, and we're delighted to speak to you again as we discuss our financial performance and strategic achievements of the past quarter.

We continue to progress on our strategic improvement efforts even as the overall IT services industry has remained soft. We are focused on strengthening client relationships and expanding the partner ecosystem, all this with a sharp focus on operational excellence through project Fortius, which has resulted in an expansion of margins for the third sequential quarter.

For Q2 FY '25, our revenue increased by 2.2% year-over-year and by 1.9% quarter-over-quarter. By region, Europe achieved a 4.1% year-over-year growth and the rest of the world achieved 9.7% year-over-year growth. The Americas growth was soft at a 2% year-over-year decline.

We see weaknesses in the communications vertical, which posted a decline of 1.7% year-over-year as our key telecom clients continue to prioritize cost savings and their spending on discretionary projects is constrained. The manufacturing vertical had a soft quarter with a moderate growth of 0.6% Y-o-Y as the outlook for discretionary spending in this vertical continues to be conservative.

Among the other verticals -- among our focus verticals, BFSI reported 4.5% year-over-year growth. In this vertical, [ we have strengthened ] partnerships for existing clients and continue to see new logos signing on. We are focused on better utilization of existing capabilities, including those of portfolio companies which is helping to build the foundation for longer-term growth in the subsegments of insurance, asset management and payments, among others. All the other verticals have also seen positive momentum with the tech, media and entertainment reporting a 2.4% Y-o-Y growth, healthcare and life sciences reporting 4.5% Y-o-Y growth and the retail segment growing by 4.7% Y-o-Y.

New deal win TCV for the quarter were $603 million and was broad-based across our key markets. We opened a new logo with one of the largest U.S.-based cards and payment services providers for an AI ops-based production management for the bank's applications in addition to a tech modernization program across application development and maintenance services, data and cloud and infrastructure engineering, making TechM the change the bank partner for the client as well.

We were chosen as a partner to a European bank for a Temenos T24 implementation program to modernize the current core banking platform and provide ongoing support of core banking systems post implementation by leveraging our strong capabilities in core banking transformation.

Tech Mahindra was selected by a leading European communication services provider for an Autonomous Operations Program, enabling them to provide the best customer experience and transform into a highly digitally mature and innovative operator by leveraging TechM's network services, application development and maintenance services and AI capabilities for its business, IT and workforce transformation.

We were also selected by a leading telecommunications company in Australia to deliver customer experience services and to support their journey to achieve industry-leading digital and customer service.

We are excited to announce several new partnerships that will enable us to broaden our service portfolio and deliver enhanced value to clients. For example, we launched a collaboration with Microsoft to modernize modern workplaces with Copilot for Microsoft 365 for our customers and employees across 15 locations. The collaboration positions Tech Mahindra as a leading global systems integrator adopting Copilot for Microsoft 365.

We are partnering with Temenos to provide a core banking offering on their SaaS platform specifically designed for Europe for electronic money institutions in the U.K. and Continental Europe. Tech Mahindra and Google Cloud announced a partnership to host gen AI adoption and digital transformation for Mahindra Group entities.

In close, partnership with the International Chess Federation, FIDE, we successfully concluded the second season of the Global Chess League in London. This collaboration significantly strengthens our brand, aligning it with the qualities of intellect, rigor and strategic thinking, which are central to both chess and our broader vision.

Operationally, we made further progress in our efforts towards cost savings and efficiency. We posted an EBIT margin of 9.6% for the quarter, an expansion of 110 basis points sequentially, enabled by savings achieved under project Fortius and the support from currency tailwinds.

The free cash flow for the quarter is USD 157 million and in line with our committed capital allocation policy. The Board has approved an interim dividend of INR 15 per share.

Earlier this year, we had called out areas where we would make above-normal investments to track improvements to achieve our FY '27 targets. We will report progress on our key investment areas annually, but would like to share updates on some of them today. We have invested in strengthening the capabilities of the focused service lines by broadening the leadership, investing in technical specializations.

We continue to invest in strengthening our fresh graduate hiring program, building the right mindset and future skilling our associates by building capabilities in AI first and cloud first skill sets. We have created a next-gen skill framework for all of our IT associates, which would fuel career mobility among our workforce. We will continue to invest in creating and sustaining an outcome-driven learning organization and cultivating our high-performance culture based on the pillars of simplify, clarify, innovate and drive a performance orientation.

It's also heartening that our commitment to excellence and purpose has been recognized. For instance, Navistar honored us with the 2024 Supplier Excellence Award for the fifth consecutive year. Tech Mahindra received this award for its performance, strategic alignment and innovative ideas in sustainable mobility.

We won the prestigious Diamond Supplier Award 2024 from Bombardier for the third time. This award is a testament to TechM successfully achieving Bombardier's operational performance standards and quality and delivery.

We are proud to have won the 2024 Oracle Best-in-Class Innovation Partner Award for App Services Partners. Tech Mahindra has also been recognized as one of the world's top 50 most sustainable businesses at SEAL 2023 Business Sustainability Awards, and we are among the Financial Times Asia-Pacific Climate Leaders 2024.

I'm proud that Tech Mahindra is also one of the most preferred workplaces for women 2024-'25 recognized by team Marksmen, and we ranked as a leader in Avasant's telecom digital services 2024 and we're placed in the leadership zone in digital engineering and ER&D services overall by Zinnov.

We were placed as a leader in contact center customer experience services 2024 by ISG and as a challenger in Gartner's 2024 Magic Quadrant for public cloud IT transformation services, among other analyst recognitions. We were ranked among the top 5 providers in the 2024 IT sourcing study by Whitelane Research, underscoring our commitment to sustainability. Tech Mahindra was recognized among the world's most sustainable companies by Time magazine. Remarkably, we achieved the prestigious #1 position among all Indian companies.

I believe that we are on the right path for a long-term sustainable transmission. Our leading indicators are moving in the right direction, and our scale at speed narrative is resonating in the market.

This year, as I have mentioned in the past, could volatile as we are in the turnaround phase. I'm confident that the platform has been set up for a long-term valuable franchise, thanks to a high caliber and united leadership team and a clearly articulated strategic plan. We look forward to diving deeper into these topics and answering any questions you may have during the Q&A session.

I now hand over to Rohit to elaborate on the financial performance, and thank you again for joining us today.

[Rohit Anand, executive]

Thank you, Mohit. Good evening, everyone in India, elsewhere in U.S., good morning. Let me begin with an overview of the company's financial performance for the quarter. We ended the quarter with revenue of USD 1,589 million, a growth of 1.9% quarter-over-quarter and 2.2% on a year-on-year basis. On constant currency, it is a growth of 0.7% Q-o-Q and 1.2% Y-o-Y. Translating this in rupee terms, revenue was INR 13,313 crores, a growth of 2.4% Q-o-Q and 3.5% Y-o-Y.

This quarter, if you see the growth was led by communication vertical growing at 2.7%. Mohit mentioned, it was a Y-o-Y decline of 1.7%, but sequentially, the combination vertical grew for us after 5 quarters, followed by TME business at 5.7% and BFSI at 2.4%. Manufacturing declined by 4% as we see softness in the auto sector.

We posted EBIT of USD 150 million or INR 1,280 crores, which is 16.2% increase over our previous quarter and the result in EBIT margins is 9.6%. Of the 110 basis point Q-o-Q expansion in operating margins, about 40 bps is contributed by ForEx movements and the balance 17 bps improvement is due to operating efficiencies and savings, as pointed out by Mohit under project Fortius.

Other income was USD 62 million or INR 521 crores, including gain on sale of land of approximately USD 54 million. The effective tax rate for the quarter was 26.6% and we posted a profit after tax of USD 149 million, which is in INR terms INR 1,250 crores. The PAT margin for the quarter is 9.4%. The free cash flow generated during the quarter was $157 million, excluding the land sale, which translates to 105.4% of PAT.

Cash and cash equivalents at the end of the quarter was $784 million or INR 6,566 crores. Based on the cash flow generation and our capital allocation policy, the Board has approved an interim dividend of INR 15 per share.

DSO, including unbilled was at 94, which is an increase of 1 day on a sequential basis, but improvement of 3 days on a Y-o-Y basis. The total hedge book stood at $2.3 billion versus $2.2 billion last quarter. And based on our hedge accounting, our net mark-to-market loss for the quarter was $3.6 million.

New deal win TCV for the quarter was $603 million. And as Mohit mentioned, the highlight of the deal win this quarter for the strategic wins in the communications space coupled with an expansion of our BFSI portfolio, the onboarding of 2 new logos, one each from the U.S. and Europe.

While we continue to expand margins, we've also made significant investments for long-term sustainable growth. Some areas of investment include opening a new center in the Baltic region bolstering our presence of service offering in Europe, expansion of partnerships in the AI, BFSI and manufacturing segments to strengthen domain-specific capabilities, investments towards strengthening our capabilities in high-growth service lines.

We've also invested in modernize of learning and up-skilling infrastructure to enable advanced skill development for our associates. The total number of employees at the end of the quarter was 154,273, including 2,000-plus freshers that we onboarded for the quarter, which is a part of our strategy, and we are online to get more than 6,000 for the year.

So to summarize this quarter, we see consistent performance around increase in deal wins, revenue growth, cost optimization and steady free cash flow generation as we continue our journey towards FY '27 stated targets.

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

[Operator]

[Operator Instructions] Our first question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Congrats on a solid execution in a tough environment. I had a couple of questions. So the first is in terms of project Fortius, of the 150 bps kind of investments that we were seeking to do in the first year, how much would have been baked in the first half?

The second, I wanted your thoughts on how are you seeing furloughs and the demand environment going in -- going forward? And any thoughts on wage increases broadly?

[Rohit Anand, executive]

Yes, sure. Maybe I'll take the project Fortius investment question first. On the demand environment, I'll pass it to Mohit, including the wage hike question. So on the project Fortius, as we rightly mentioned, we've said that we will broadly invest 1.5% of our margins for long-term investments. And we are kind of accelerating that moving into Q1 to Q2, as we screen all these investments and the benefit that we'll get out of that.

So I think from a pacing perspective, you should see second half being slightly heavier than the first half, but every quarter, we are getting towards all the investments, as I gave examples to you on some of those to make sure that we set the right platform for our FY '27 goals because it's important that while we drive short-term metrics, which are -- you see in the financial subcon reduction, you see improvements around CNB as a percentage of revenue, but at the same time, we're also going to make sure that we are making these investments for long-term mix change of business, long-term change in terms of the composition of the organization we want to drive. So I think just coming back to your answer, it's equally spread out through the year. Second half might be slightly more, but not materially different.

[Mohit Joshi, executive]

Yes. Thank you, Rohit. Nitin, on your question on the furloughs and the demand environment first. Look, I think we all know that Q3 is a seasonally weaker quarter because of lower working days and because of the furloughs as well. We see the same pressures of furloughs as we have in the past, but I also reckon it's a little bit early, and we'll probably get a better visibility on the furloughs over the next 4 to 6 weeks, as the customer expectations start to flow in.

As far as the demand environment is concerned, I would say it's largely unchanged from what we had said the last time. We don't see any significant difference. The one thing that we have mentioned, and which you see in our results as well, is a slight softness from a manufacturing perspective, especially for auto, where we do have a significant exposure in Europe and in the U.S. But overall, I would say the demand environment is broadly similar to what we saw coming into Q2.

On the wage increases, again, this is something that we have kept in mind. As we have shared in the previous quarter as well, after the conclusion of the Q2 results, we're going to assemble together as a leadership team and discuss both the sort of expectations from a salary hike perspective as well as employee, as well as the affordability question, and we expect to close it out over the next few months. So that is what we're thinking about from a wage hike perspective. Hopefully, that answers your question, Nitin.

[Nitin Padmanabhan, analyst]

Yes, it does. That's very helpful. If I can just squeeze one quick one in as well. From an offshore mix standpoint, I think there's been a pretty good sort of improvement on a year-on-year and sequential basis. How are you thinking about your targets on that, where you think you'd be pretty comfortable longer term?

[Mohit Joshi, executive]

Yes, look, I think it should be stable. And obviously, both from our perspective as well as from our clients' perspective, there are certain benefits towards going offshore. But I don't think there is any major trend shift that we're expecting over the next couple of quarters at least.

[Operator]

The next question is from the line of Rod Bourgeois from DeepDive Equity Research.

[Rod Bourgeois, analyst]

Great. So as you execute your transformation plans and investments, I wanted to ask if you're seeing additional early signs that you're making underlying progress towards your fiscal '27 target. So I guess I'm asking, are you seeing underlying signs of more improvement progress either in the organization or also in Tech Mahindra's positioning with its clients?

[Mohit Joshi, executive]

Thank you, Rod. So look, Rod, as we had shared in April, right, and we went through a fairly elaborate process to figure out what our long-term metrics should be and how we're thinking about transformation. And if you will recollect, we had stated that the transformation would be on the 3 pillars of our strategy, which is growth, margins and organizational transformation. And we had also defined the long-term metrics that we expect to use to measure our progress, right?

So while we are not formally sharing the progress across all the metrics, maybe we can give you a little bit of a flavor about the change that has already happened. So first on growth. On accounts with revenues greater than $20 million, we have grown 1.5x the pace than the rest of the company. And this is the result of the focus that we have on our top accounts under the Turbocharge program. And as we've shared previously, we are investing in dedicated client and delivery partners for our top accounts, we have a significant program of work to develop account-based marketing for top accounts. There is training for our top teams and infusion of deep technical and architecture talent for these accounts. And we are seeing the early results of this investment in terms of accelerated growth for our top accounts. So that's the key metric from a growth perspective.

From margins perspective, we are working on both short-term and long-term measures. On the short term, you can see a reduction in CNB, including subcon costs as a percentage of revenues as we are adding -- and at the same time, we are also adding more pressures to the company and investing in the long term, right? So from a short-term perspective, there is the reduction which you're seeing including in subcons and from a longer-term perspective, it's the infusion of fresh graduate trainees and the investments that we're making in training to make sure that they can be -- will be absorbed into the workforce at a rapid clip.

From an organization perspective, one of the key things that we're working on was the area of cultural transformation, right? So keeping the intrinsic strengths of TechM, but initially, simplifying, clarifying, innovating and driving performance management. On the innovation track, for instance, we are tracking our progress on gen AI skilling and how we're embedding that into our deals. So for instance, fully 1/3 of our IT services workforce is now using GitHub Copilot, right, which we think is ahead of our peer groups. And in addition, obviously, there are people using the AWS and the Google solutions as well.

We are also seeing the percentage of gen AI-infused deals go up every quarter. So I do feel that across the 3 elements of our strategic plan, growth, margins and organization, we are seeing progress on the long-term metrics that we had shared with all of you in April. Hopefully, that answers your question, Rod.

[Rod Bourgeois, analyst]

No, that's great. And just a quick follow-up on the transformation plan. To what extent are you prioritizing large deal wins in your plan? I guess I'm asking because large deals can definitely boost your bookings results, but they can also sometimes require margin sacrifices and contract risk, right, to win those large deals. So I'd like to ask how you're thinking about large deals in the overall plan?

[Mohit Joshi, executive]

Yes. So Rod, look, we had clearly identified large deals as a key factor that will drive our growth, right? And we have invested in creating significant large deal capability within the organization. The way I think about large deal TCV in any given quarter, right, is that it's a function of the size of the pipe that you can build and your conversion rates. Now to build the pipe for large deals, and we do get invited to almost all the deals in the market.

We have invested in creating a sales force that is focused on our must-have accounts, the investments that I already referenced earlier that we're making in our top accounts from our Turbocharge program. We've also, under our Chief Marketing Officer, build out extensive program of work to build on the relationships that we have with the deal adviser and the analyst community. And so we see a constantly broadening pipe from an invite perspective. And then equally, we are working on improving our conversion rates, which we track very closely.

And for that, we are ensuring that the quality of our technical solution and our commercial solution is very robust. So we have invested in deal architects, technical architects as well as negotiators. We're also constantly working on the commercial elements of our offer. And we are seeing the results through -- coming through -- you saw a healthy clip of deal wins for this quarter as well and a predictable quarter-on-quarter improvement.

However, we have also been very clear about the fact that we will prioritize margins over large deals at this point of time. And we want to be very clear, right, that in this environment, obviously, it is very tempting to do the sort of deals that can potentially come back to bite you later by making what I would say heroic assumptions about productivity or making heroic assumptions about what can be accomplished. And we are shying away from that, right? So it is, as you can imagine, as a sales team, a little bit difficult. But we do feel that we are being incredibly disciplined. But at the same time, there is a huge will to win and to make sure that we are getting our fair share of large deals. I also feel that we are creating the institutional capabilities that will help us broaden the pipe and improve our conversion rates going ahead.

[Operator]

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

[Abhishek Kumar, analyst]

Very encouraging to see second consecutive quarter of new logo wins in BFSI. Mohit, my question is, given your relationship and your leadership team's relationship, opening new logos is -- while it's the right step, probably the easier one, given the competitive intensity in this sector. Two questions. One, how should we look at scaling these accounts given the competitive nature? And second, what kind of contracts have we got are these broader MSAs that we have signed or these are smaller SOW kind of work to start with?

[Mohit Joshi, executive]

Abhishek, thank you for that question. Look, I think we are -- we have identified financial services as a focused vertical for us. Just given simply the fact that this is where the largest spend pool is, right, from a tech service perspective. Now, I would slightly differ from you in terms of the ease of opening logos, in my own experience, right? And I would qualify that by saying that we are focused on serving the largest financial institutions across the globe. I do feel that it is harder to get in, once you get in, because the doors are closed fairly tightly. Once you get into the preferred supplier, landing and expanding is relatively easier, right? It is harder to get in as opposed to other verticals where it may be easier to be selected as a preferred supplier, but then harder to win business. So that's the first piece.

The second piece is we have clearly identified that we cannot be a me-too player, right, or a cut-price player from a BFSI perspective. And so therefore, we've identified clear areas of differentiated strength from a Tech Mahindra perspective that are coming from our own experience as well as the experience of our portfolio companies. And some of these areas are, for instance, in insurance, where we have industry-leading capabilities in Guidewire, among other things. It is coming from the focus that we have on asset and wealth management, where because of Citisoft and our own experience, we believe we have a depth of subject matter expertise. It is coming from payments where we have experience working with issuers and with the networks. It is coming from core banking where we have strong partnerships with a variety of leading software providers. And so we are focused on the must-have accounts and looking to open the must-have accounts through areas where we have differentiated capabilities rather than being a cut-price player.

Now with regard to the wins, it is a mix, right? So for instance, we shared the details of one deal, which is a large maintenance and development deal with a card services provider. But equally, there are other clients where we have gotten permission to enter as a preferred supplier, and that has opened up all sorts of doors for opportunities in diverse areas of the business. There is a bit of a mix.

I do recognize that financial services is a hugely competitive industry. And it is a space where all the players are very, very focused, but I do believe that we have the makings of being a credible challenger in this space, and we have a very well-thought-through strategy and really a depth of talent that understands the industry, understands the key players and is able to build the compelling solutions that allow us to be in the consideration set of our clients.

[Abhishek Kumar, analyst]

That's clear. One maybe related question on demand in BFSI. Some players are falling out some discretionary spend, especially capital markets, et cetera. Have you seen any change in the customers' behavior in BFSI?

[Mohit Joshi, executive]

So I'll just mention 2 things. One is it does seem that there is the BFSI sector where the spend level seem to be slightly elevated compared to about a year ago. But as we've mentioned that because the sector is so heavily concentrated, right, that -- and a downturn in a single client can wipe away the benefits that you're seeing elsewhere. And finally, BFSI is also the sector that is most exposed to furlough pressures, right, along with manufacturing, so there is that element to consider as well. But on the whole, I would agree that there appears to be a slight improvement in sentiment, but it's not a dramatic equity shift.

[Operator]

[Operator Instructions] The next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

Congratulations on steady progress towards your long-term strategic objectives. My questions are on top 5 clients continues to see weakness for last few quarters. Where do you see this bottoming out?

Secondly, where -- is your current deal win trajectory enough to get you to industry growth rate next year? If not, then what should be the target quarterly win rate one should look at and the puts and takes for margins in the second half.

[Mohit Joshi, executive]

So I'll answer the first part of the question and then pass it on to Rohit for the puts and takes from a margin perspective. Now if I look at our top 5 clients, right, candidly, there is a preponderance of telecom clients among our top 5, right, while the top 30 is more diversified. For the top 5 clients, we do have a significant number of telco clients in that space. And over here, specifically for a couple of clients, we are seeing significant budget pressures that they're facing as a result of their own challenges, as a result of high-interest rates.

And we have dug in quite deeply into these accounts to make sure that we are not losing market share. And so I'm quite comfortable based on the conversations that we've had with the clients that we are retaining market share and any reductions that we're seeing are the results of their own budget cuts and in some cases, a degree of in-sourcing that is happening. But I do feel quite comfortable that for our overall top account portfolio, we remain a strategic partner and credible long-term partner, right? So I'm quite comfortable that there is no loss of competitive positioning from a TechM perspective there. Rohit?

[Rohit Anand, executive]

Yes. Also from a deal quantum perspective your question, how do we kind of look at the range for us to drive industry average growth for next year. I think we've said that earlier as well, somewhere around 600 to 800 is kind of a range for us to look at from an industry average. It obviously varies given the tenure of the deal, so there's variation around it, but that's already the range you should look at. We've -- in the last couple of quarters, we were below that. Now we crossed that threshold. I think as we move forward, that's the endeavor for us to be in from a next year perspective, right? So that's kind of the way to think about it.

In terms of margins, I would say, short term, we're working on everything possible. You can see it in the subcon reduction, the percentage of revenue that's come down sequentially over the last few quarters. We'll continue to drive that even further. We've mentioned that we feel we can get to single digit on those. So that will continue. Our governance around project management and execution is a big focus for us to drive change requests, automation, deliver the benefit that we can drive on the fixed price program. So that will be a big, big focus area for us as we move forward.

We're focusing a lot on pricing as well. I think there's a lot of tools and analytics that we're driving internally. There's a dedicated program, which is rolling up from a governance standpoint to Mohit, just to ensure that we're getting the right entitlement from a pricing perspective. So I think it's spread out across various factors, give us the balance that we need from a short-term perspective. And as I mentioned, we're also investing in the business, right? It's very easy to look at short-term gains and forget about that, that where we're very clear on our strategy from April that we articulated. So we're continuously focusing on that investment because that's what's going to give us benefit in year 3, right, year 3, year 4, year 5. So that's the way we're thinking about it.

[Operator]

The next question is from the line of Sandeep Shah from Equirus.

[Sandeep Shah, analyst]

Congrats on a good quarter. Mohit, just wanted to understand with your recent talks with the communication clients, the rate cut creates some hope in terms of recovery in the demand may not be immediate, but next year in CY '25 and if more rate cut comes, this could be also a growth driver for Tech Mahindra going forward.

[Mohit Joshi, executive]

Yes. So clearly, rate cuts will offer a degree of relief to many of our telecom clients because they're carrying heavy debt loads and will, therefore, allow them to maybe spend more from a tech perspective, right? I also think that as you look at this quarter itself, if you look at our performance from a Q2 perspective, you will see that we have had Q-on-Q growth from a comms perspective. And that is coming from the fact that we have actually seen stabilization and growth in our Asia-Pacific comms portfolio and in our Europe portfolio, right? We continue to see stresses in the U.S. portfolio. But again, we are also hopeful that this will turn around next year.

When I think about our telecoms practice from a longer-term perspective, I do feel that we have a significant range of capabilities that we offer to these clients broadly on the 3 buckets, right? The first is under the simplify bucket, where there's an opportunity for OpEx cost transformation by really impacting operations. And one of the deals that we spoke about in this particular quarter, for instance, has been about autonomous operations for a leading European telco.

We also feel that we have a great set of solutions around modernizing the tech stack, which really impacts our telecom clients in reducing their time to market and improving their customer experience. And over here, working with ecosystem partners like a Salesforce or like a ServiceNow, we believe that we have a great set of solutions.

And finally, in the longer term, we feel that we have the opportunity to help our clients monetize their assets and to drive their revenue growth. So when I take it all together, right, our opportunities to work with clients on the cost perspective and the modernization perspective and on the revenue growth perspective, as and when the industry does come back to growth, we will be very well positioned given our expertise and a very clear strategic vision for how we expect to help the industry leap forward into its next phase.

[Sandeep Shah, analyst]

Okay. And just last 2 questions. In terms of BPO being 16% of your top line, Mohit, are you worried because of the gen AI may disrupt BPO higher than most of the other horizontal?

[Mohit Joshi, executive]

Well, I would be worried if we were standing still, right? But we are not standing still. I believe that we have among the most forward-looking and agile teams from a BPO perspective, and our teams have really worked to reshape the portfolio over time. If you look at our portfolio, maybe a few years ago, it was heavily weighted towards contact center, but we have now replaced that with a huge amount of analytics work, for instance, that is being done with the high-tech companies. It's been replaced by specific vertical solutions that have been built. It has been replaced by crowd-sourcing platforms, for instance, that have been built. So I do feel that we are reshaping and moving up the value chain from our BPO business perspective. And so I remain very optimistic about the future of the business, given the strategic direction and the leadership team that we have within the organization.

Obviously, we will always be paranoid. We're always mindful of the impact that gen AI could have on contact centers, for instance, but I do feel that we are well positioned compared to our peer group and the opportunities continue to expand. We feel that there is a whole host of opportunities, for instance, in the high-tech sector and financial services and health care that we have not fully exploited so far.

[Rohit Anand, executive]

I just wanted to add, while COVID has really helped us balance off, right, the risk there, but even in the contact center, I say we're seeing more and more deals surprisingly come through, right? And the team has been quite nimble and agile to get a fair share of that. So I think it...

[Mohit Joshi, executive]

Yes, I think that the AI-enabled contact center is really a winning story for us and really differentiates us from maybe the pure-play contact center players, who do not have that deep AI capability that we have built as an organization with really a preponderance of technology talent.

[Sandeep Shah, analyst]

Okay. Rohit, just last question on the offshore headcount mix for the IT services. It is up by 300 bps on a Y-o-Y basis. So does that also mean the offshore revenue mix is increasing? And if yes, why we are not calling out as an immediate margin tailwind as well?

[Rohit Anand, executive]

Well, I think that's been a consistent effort Y-o-Y. So yes, it is a factor as we really called out, right? We called out that we will be continuously driving more offshoring, and that's a function of every quarter efforts that we're doing. So yes, there is a continuous improvement that we're having, and we will continue to drive that, Sandeep. So every quarter, you'll see a movement there. It's a little bit of new deals as we keep on getting, what's the on-site offshore ratio. And with that, the transition happens over the period of 2 to 3 quarters. So it's a result of that. And obviously, inherently, we had some opportunity to work with. So as we continue to work around it, this will be a factor for us as well.

[Sandeep Shah, analyst]

And does it implied higher volume growth versus reported revenue growth because we are moving more work to offshore?

[Rohit Anand, executive]

Yes, marginally, marginally it does impact, but I think we have -- when we look at our overall revenue and volume, the differential with the movement is not that significant right now.

[Operator]

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

[Kawaljeet Saluja, analyst]

Congratulation on a great quarter. A couple of questions for you, Mohit. First is that if you look at comms for Tech Mahindra, there has been market share losses till FY '24 due to aggressive competition and maybe possibly state of flux at TechM. Do you think we have made sufficient interventions to clearly call for the turning of the corner in the telecom vertical? And related to this is the comment that you made on possible challenges in the U.S. communications market, is that something which is competition induced or is it just basically to grind themselves under stress? So that's the first question.

The second question is that you made a comment on large deals that you don't want to make a heroic assumption on execution. Now is that TechM being conservative? Or are you seeing a lot of heroism now from your competition on large deal assumptions here?

[Mohit Joshi, executive]

Sure. Thank you, Kawal, thank you for the question. Look, I think on your first question, right, I'm quite comfortable, based on my detailed discussions with our top clients, that there is no market share erosion. We have an unique and differentiated set of capabilities, as I've shared in the prior answer whether it is from a simplify, modernize and monetize perspective that we bring to the telco industry and an unique set of capabilities both from an IT perspective and from a network perspective, right?

Also, as you look at our portfolio in the current quarter, but really over the past couple of quarters, you are seeing a degree of stabilization in the Asia-Pacific business and in the Europe business. And I'm quite confident that over time, the stabilization and growth will come back to the U.S. portfolio as well.

As regard to sort of the specific large deal losses, again, I will go back to the answer that I've given to Rod on large deals is that we have to be -- at this current stage of the transformation, we have to be laser-focused on what we are looking to do and what we have promised the market, right, which is a significant and predictable expansion in margins for FY '27. And so therefore, we have to be mindful about in telecom, but also in other verticals about the deals that we are playing for and winning. I do believe that we have the right to win deals that makes sense for us. And I'm confident that as the sector itself comes back to a healthier spend level that we will gain from that.

Also, keep in mind that we are the only IT services player that has an unique software capability as well for the telecoms business. And so when I marry the Comviva software capabilities, with our tech capabilities and our BPS capabilities, no other player has the same offering set as us. But again, please be assured that we have been in detailed discussions with our clients, and our client relationships are strong.

We continue to infuse talent on a regular basis to our comms business. Just to give you a couple of examples. We hired a very experienced senior technologist who's been a CIO for multiple telcos to our APJ business to supplement their existing team. We hired senior network talent for our U.S. business to supplement our network services capabilities. And we are in the process of hiring senior talent for our European operations as well, right? So it's continuous add of capabilities to add to the already deep bench that we have in TechM.

You had a question on large deals, right? Look, I really don't know how our competitors are thinking about this. But I do know that for us, discipline and focus is very, very important. When I speak about heroic assumptions, the fact of the matter is, there is a level of productivity that we can see coming from gen AI. But from what I understand, and it is quite evident in the pricing, when people are making assumptions about deals that could be -- have a 5-year type tenure, they are assuming productivity in the out years, which is not visible to me just now. So I can only assume that they are making assumptions ahead of the capabilities, and it could be a reasonable assumption, right? At the end of the day, this is how the chip business works. This is how a lot of business works. If you assume productivity coming in from things that you can't see, we are just not in a place where I'm comfortable making those bets because we have a margin target that we have committed and that we have to meet.

[Kawaljeet Saluja, analyst]

That's very clear. Very helpful response, Mohit. If I can ask you a final question that I had is more on the auto segment. And I just wanted to understand the composition of that business, the nature of program split between, let's say, engineering and IT services, split between Tier 1s and OEM, and anything happening in the vertical given the kind of state of flux which is there in the OEM segment, auto OEM segment, anything that raises a red flag for you?

[Mohit Joshi, executive]

Yes. So look, I think auto has obviously been a significant portion. So if I look at our manufacturing business, for instance, there are a couple of areas where auto is clearly one, but we also have aerospace and industrial. And then we do a lot of work on the process side and in the chemical and the extraction-related businesses, right?

If I look at our automotive footprint, our automotive footprint is largely actually in the -- has a bias towards the Americas. But we do have a presence in Europe and the ROW piece as well, that gives you a sense. We also, obviously, have auto exposure because of our Pininfarina business. And the business is almost equally spread between the work that we do for the tier 1 suppliers and the work that we do for the auto companies directly.

We have been working extensively on creating out -- we do feel that if I look at the auto business, that we have a set of capabilities that we are creating across the entire chain. And by that, I mean we are creating deep capabilities from an engineering perspective that you referenced, but also supply chain is a very significant portion of the business for us, again, given our SAP capabilities, for instance and capabilities in other packages.

Manufacturing and quality, again, given the heritage of the group and the work that we're doing to build out the factory of the future. But again, a lot of the AI-driven interventions are coming through, right, whether it is a paint defect detection or vision-based quality or doing digital twin construction or AI-based dynamic buffer management. On the manufacturing and quality side, we have unique set of capabilities.

And then beyond that, in sales and marketing, through bond and through a set of IPs that we've created and in the aftersales market, it's a very comprehensive offering that we have in auto with 75-plus solutions bought under the auto portfolio. So it is comprehensive across engineering, IT and maybe some amount of IP-related work as well.

And as far as the auto business composition is concerned, I'll give you a sense, it is largely the auto manufacturers, some work with tier 1 suppliers and with a bias towards the Americas. So hopefully, that gives you a sense of where we are.

[Operator]

[Operator Instructions] Our next question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

I wanted to [indiscernible] segmental margin performance that we see in the current quarter...

[Operator]

Sorry to interrupt. Mr. Taneja, your line is sounding a bit muffled. If you can use the handset mode if you're using the speaker phone.

[Manik Taneja, analyst]

Is this better now?

[Operator]

This is much better. Yes, sir, please go ahead.

[Manik Taneja, analyst]

So I was interested to understand the moving parts when I look at your segmental margin performance, it seems that the IT services margins have expanded significantly over the course of recent quarters, particularly the highest that we've seen in several quarters, while there is some reduction in terms of the BPO margin. So would be great to understand what are -- what is driving this segmental margin performance?

[Rohit Anand, executive]

Yes. Sure, Manik. So I think from a margin perspective, when you look at BPS, we did mention earlier also, we've done some portfolio reallocation, which likely fit in the BPS segment, example, Target, right, is one business which is dilutive from a margin perspective. So that's impacting, of course, the BPS performance. And then beyond that, for the quarter, there's some largely ramp-ups that are going on, which is negatively impacted the quarter. But as they move forward, we see that trajectory to improve significantly going forward. So I think we'll see an expansion there. From an IT perspective, the improvements we've been talking about, so we'll be consistently working on that organically.

[Manik Taneja, analyst]

Just one clarification on that part. Historically, our segmental margins for BPO have been higher than IT services. Is that going to change on a go-forward basis because that's a trend from first half performance?

[Rohit Anand, executive]

No, I think both of them, we will have an expansion mode. I think clearly, BPO is 15%, 16% of our revenue. As Mohit mentioned, it's an area where we're seeing significant demand. Even though we're working on portfolio shift, we're working on how gen AI impacts the business. So as we're shifting the portfolio, even within that the growth opportunities are dramatic. So as we get that, it's important that the BPS business continues to expand margins in line with our portfolio expectations.

So we see a path for us to deliver on that and some of the portfolio companies that we've reorganized under BPO we see an expansion happening there also over time. So I think BPO will expand margins and will flow through along with the portfolio average. I don't see a dilution coming from there. And IT, as we've rightly mentioned, given majority of the business from -- 85% is IT, I think that has to drive the expansion across the organization because that's what will reflect in the total company performance as well.

[Operator]

Our next question is from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Mohit, you talked about how your large deals capability has been strengthened. But when we look at year-on-year, it just seems to have -- those deal wins have reduced. If you were to think about the environment, I would think we are actually in a little bit of a better environment compared to where we were last year this time, when [indiscernible] there should be collapse and all that things were a bit difficult.

And similarly, when I look at your 20 million-plus customer tier as well, that's flat year-on-year and your 50 million-plus customer count is down [ 11 ] year-on-year. And Rohit, the land sales that you mentioned, could you talk a bit about the rational for this, who was the sale made to? And why is it structured in a way where the payout is actually happening right only after 4 years or so and you're getting an interest of 8% plus on the amount?

[Rohit Anand, executive]

Maybe I'll take the land question first, and Mohit you can answer both. Yes, so I think the intent always was to get an university -- Mahindra University to work as an autonomous body, right, and build -- be developed and functioning like any other big university. And when we look at that model, in that structuring, we made that transition from an ownership to get more autonomous. So that's the reason why the transaction happened and is at arm's length. From a value perspective, the consideration, while it's deferred over a period of time, has an arm's length interest associated with that, which will be paid along with the deferred consideration. So we've recognized the gain in the current quarter in differential between our book value and the market value that we've got, and that's reflecting in the P&L.

[Mohit Joshi, executive]

Yes. And on your question on the large deals, look, I think there really isn't -- if I look at the past 6 quarters, for instance, from a large deals perspective, right, I just want to read out the numbers to you in dollar millions from Q1 FY '24 to Q2 FY '25, $359 million, $640 million, $381 million, $500 million, $534 million, $603 million. There, you see the pattern of reduction in large deals, if you look at it. We are certainly trending way above the 6-quarter average.

But having said that, I'm also mindful of the fact that as a leadership team we have made a determination that we are going to focus on margins, that we're going to be very selective about the clients we go after and that we've established a very clear must-have priority list of customers that we're working with and sort of a discipline about pricing and about the deals that we take on, right? So you're seeing some of that being reflected in our results. Large deals continues to be a very important area for us, but I candidly do not agree that there has been a deterioration over the past 6 quarters. It's certainly not borne out by the numbers.

[Rohit Anand, executive]

Yes. Maybe I'll add one more point, Ravi. As you think about our large deals number, it's [ $5 million ] incremental deal wins, right, which gives you an indication of how the growth is going to flow through. And I had given an earlier range that we want to be in, right? So I think from that perspective, we're looking in the right direction.

Also a lot of expansion that we do into the BFSI space, which is where our strategy is. As Mohit mentioned and I mentioned in my commentary that we've gotten into 2 large logos and it's like landing and expanding there, so the growth that we see in those accounts are not really reflecting in the large deals, right, because those are volume that grows organically over a period of time. So I think as we do more of that, you would see a better organic growth pattern also over and above the deal wins that you see.

[Operator]

The next question is from the line of Abhishek Pathak from Motilal Oswal.

[Abhishek Pathak, analyst]

So Mohit, I think the first phase of the transformation, which was essentially the turnaround phase seems to be admirably on track, so congrats on that. My question was as we move to the stabilization phase, FY '26 might coincide with a slightly liberal spend environment. And just like in your case, everybody has again reported probably a bottom-up attrition. We saw a slight inch-up in attrition across the board. So in FY '16, as attrition levels inch up, the cost of backfilling employees again goes up, how easy or how difficult does it become to fix the pyramid and get the average resource cost down? And what are the challenges that arise in that margin expansion journey as you move to the next phase in context of the changing demand environment?

[Mohit Joshi, executive]

So a good question. I think, look, if there is an overall pickup in demand, then I think that will really help us because obviously, resetting the pyramid is easier if you're looking at a significant amount of growth, right?

As far as the attrition rates are concerned, we are also mindful of the fact that attrition will start to pick up slowly. We benefit hugely from the very strong Mahindra brand name that we have in India that helps us from a recruitment and from a retention perspective. And we are organically building deeper relationships and linkages with the group to benefit from the aura of the group.

I also feel that we are working along with our Chief HR Officer on creating an employee -- a strong employee value proposition. And we have already articulated a lot of the work that we're doing from a cultural transformation perspective, including simplification. Part of the simplification is things like expense reimbursements for instance that really make life simpler for our teams. So there is a multi-pronged attempt to ensure retention, and growth will help us fix our pyramid to a greater degree than we can now.

I also want to stress on the fact that we have the most experienced workforce in the industry at this point of time candidly, right? We have a diamond-shaped structure just now. And that also gives us unique strengths, right? And one of the things that our Chief Operating Officer has been very focused on, Atul, is working to make sure that we're able to get the sort of realizations that we should for such an experience workforce. So a number of steps are in place to make sure that we can fully derive value from the experience workforce that we have and then to reshape it over time. Part of it is also investments that we're making from a technology perspective.

We have just implemented a new platform that allows us to fully capture the skill set requirements of our teams. There's a lot of work that is going on in sort of defining skills and capabilities and defining the sort of detailed architecture for that, that can be used both from a matching perspective as well as a training perspective. So a comprehensive set of interventions in place to make sure that we have a robust and nimble workforce.

[Operator]

Our next question is from the line of Ashwin Mehta from Ambit Capital Private Limited.

[Ashwin Mehta, analyst]

Just a follow-up to an early comment you made that the volume and the revenue growth for us is not materially different, despite almost 5.5% shift towards offshore in terms of headcount. So was it underlying underutilization? Was it fixed-price flexibility that's helped us? Or there are other factors at play?

[Rohit Anand, executive]

Yes. So as I mentioned earlier, there's various factors we're working through, right? So we've -- as I mentioned, there's better price realization that we're going after the program. Mohit also mentioned about how do we better utilize the skills that we have, the diamond shape organization, while we keep on driving towards more freshers, at the same time, I think how do we realize the true value from a pricing perspective. So that's all in motion. So that's seeing some benefit and we'll continue to realize that benefit over the second half.

As we look at the fixed price contracts that clearly articulated, that will be a big focus for us. Atul and I drive a very systemic program around fixed-price programs, which is driving more discipline around governance, the automation interventions that we drive in those programs, I think that's also helping us realize better value. And I think we're in a very early stage of that program from a value realization perspective as we look at the next 1.5 years, that will be a key focus of our margin driver. So I think all those are helping us offset some of the shift that you see from a headcount perspective.

[Operator]

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

[Rohit Anand, executive]

Yes. So as we look at the second half, and Mohit, I'll let you summarize it, but I just want to kind of mention that getting into the second half, we're fairly confident this is the foundation we've set on the turnaround phase, so we'll continue to capture on that, both on margins and growth perspective.

I think specifically for Q3 last year, we had one-timers of 22 million that we had called out around some of our product-specific revenues, which, of course, from a year-on-year comparatives won't be repeated. But as we look at second half, looking at foundational inputs that we've given both on growth and margins, we're fairly confident that we'll continue the trajectory we've had in the first half as well.

Mohit, I hand it over to you for the wrapping comments.

[Mohit Joshi, executive]

Thank you, Rohit. So again, just to reiterate, we're delighted by our performance within the quarter. And I also feel that, more importantly, we're living up to the strategy that we had laid out for all of our investors in April. We are on the path to a sustainable long-term transformation. And I feel very confident that with the intrinsic strengths of Tech Mahindra, the high-caliber leadership team that we have assembled together and the solutions that we are creating and the client base that we have, that we are well set to meet the expectations that we have set earlier in April. Look forward to connecting with all of you on a regular basis, and thank you for your time today.

[Operator]

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