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Tech Mahindra Ltd
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Ladies and gentlemen, good day, and welcome to Tech Mahindra Limited Q3 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Vineet Nayyar, Vice Chairman from Tech Mahindra Limited. Thank you, and over to you, sir.
Thank you so much. Good evening, folks, and welcome to Tech Mahindra Quarter 3 FY '18 Earnings Call.I'm delighted to be here and share with you that we have delivered yet another quarter of all-round growth in revenue, margin, profits and cash flow, amongst other aspects of improved performance.While Milind will take you through the financial details, let me take you through the certain aspects of our business.Last year, was a year when we commenced laying the foundations for the new Tech Mahindra. The journey was tough and adverse, but one that was -- that has begun well, as seen from the outcome of the past few quarters. We structured -- we restructured our organizations to be agile and more responsive to have a dynamic business demands, started focusing on new technologies, driving automation and productivity and brought in companies and partners, who believed in our brand philosophy of connected world and connected experiences.I really look forward to 2018. The biggest opportunity and challenge for us continues to remain the same. The incredible pace at which innovation, disruption and adoption of cutting-edge technologies is impacting our lives. Today, Alexa as a ilk, a part of many of our lives, managing our to-do list, sensing our choices and playing music, news and updates that appeal to us. The pace of invention is staggering and so is the pace of change, making it doubly important for us for business to be future ready. The question on everyone's mind, be it customers, partner or associate is, will we as an organization remain relevant for the future of the customers' businesses?With a view to embrace change and become future ready to rise, we have identified the following few technology areas where we will focus. Networks of the future, one. Internet of Things, two. Framework, three, and customer experience, which is fundamental to every endeavor, four. These are primarily based on our core strengths and market demands and build on our brand philosophy of creating connected experiences for a connected world.We have been investing in areas pertaining to future of technology like IoT, AI, ML, VR, Blockchain, cybersecurity, big data, analytics and robotics. This quarter saw our company take quite a few steps in these emerging areas. For instance, we joined hands with Toshiba Digital Solutions to target smart factory markets IoT workspaces. We launched with AT&T and the Linux Foundation an open-source AI platform called Acumos to enable creation of an industry standard for making AI apps reusable and easily accessible to any developer.Three, TECHM is one of the first system integrators to complete an in-production Blockchain implementation that intermingles with block legacy systems for one of the largest public-sector banks in India. This project was awarded industry recognition.Four. On the communication side, we took a minority stake in Altiostar, a telecom software company and leading provider of virtual RAM, a nascent, but promising and fast-growing virtualized radio access network space.I am pleased to see steady progress being made in our future tech beds.In addition, one of our key focus areas for this year is nurturing talented -- our talent, and we have tied up with the world-class content partner such as edX and Pluralsight and within an AI-based personalized learning aggregator like EdCast, among others to ensure that our human capital, intellectual machinery being reskilled and honed to become the workforce for the future.My mantra for 2018 would, therefore, be to embark upon the journey of reinventing and redesigning the future by pledging to lead the change. I also think that in this journey of accelerating TECHM's transformation, we have managed to see some quick results. Our enterprise business delivered a well-balanced performance across verticals. Manufacturing, BFSI, TME and health care have grown at about 10% year-on-year. We have one large deal in health care, insurance space this quarter. And saw BFSI customers added to USD 50 million customer count. I know that our communication business could have been better, but we have stemmed the decline, and this is despite our conscious decision to let go of some of our low-yielding business during the last year, with a view to improve the business mix of the communication portfolio.This has helped us enhance our revenue realization by focusing on high-value service lines and new offerings. We remain very consistent and focused on the execution of our 343 strategy, as discussed in the analyst meet, and are completely aligned to the areas, where service providers are spending their time, energy and money.We have embarked upon two-pronged approach of partnering with our largest customers, as they transform and realign, with the help of our 343 strategy. And secondly, on helping them in their growth initiatives in their new lines of revenue streams.Strategy of super-sizing relatively smaller customers has started working. And I am happy to report that one of them will be entering our $50 million club soon.Further attraction with some of the new age technology challenges in the provider space is quite satisfactory.Now I'll ask Milind to talk -- to give you a perspective on the financials of the company. Milind?
Thank you, Vineet. Good evening, everyone. Let me take you through the financial highlights for the quarter ended 31st December 2017. Revenue for the quarter was $1,209 million versus $1,179 million in the previous quarter, a sequential growth of 2.5% and 8.3% Y-o-Y. We had a minor cross-currency benefit of 10 basis point on Q-o-Q basis. Revenue in INR terms was INR 7,776 crores versus INR 7,606 crores in Q2, up 2.2% Q-o-Q and 2.9% Y-o-Y.EBITDA for the quarter was at $197 million, that is INR 1,265 crores as against $171 million in Q2. EBITDA margin was 16.3% versus 14.5% in Q2, improvement of 180 basis point on the top of improvement of 180 basis point, which you have seen in Q2. The margins tailwind came from improved utilization from 81% to 83%, improved business mix and improvement in the profitability of portfolio companies.The margin headwind was in the form of seasonal furloughs. Currency. There was no currency impact on the margins during the quarter, while on a Y-o-Y basis, it's about 50 basis points adverse.Other income for the quarter was $35.1 million, as against $49.8 million in quarter 2. Forex gains at -- were USD 15.8 million for the quarter, as compared to $35 million in Q2, which explains the reduction in the other income. And the reduction in forex gain was primarily due to translation losses on the dollar receivables. I mean, as rupee has appreciated against dollar on a quarter end -- quarter-to-quarter basis, somewhere about 2.2%.Forex gains for the quarter as well as for April, December compares well with our peers. During the quarter, we sold off Pakistan operations of LCC, resulting in a small gain of $1.4 million, which is a part of the miscellaneous income, which I talked about, okay.The tax rate for the quarter was 21.7% of PBT, as against 25% in Q2. PAT for the quarter was $147 million, and the PAT margin was 12.2%. In INR terms, PAT was INR 943 crores, as against INR 839 crores in Q2.Cash flow from the operations for quarter 3 was $150.5 million, which is 76% of EBITDA.Last quarter, you'd remember that we spoke about an IP partnership deal, involving a payment of $140 million, and a part of that payment was made in cash is of -- part of the payment of $35 million was made in Q2. And we have paid about $8.75 million towards the IP partnership deal in this quarter. We talked about forex gain. Our hedging strategy, which we have followed continued to serve us well. And as I mentioned, we reported a forex gain of $15.8 million in Q3. We have hedges of $577 million at INR 72.20. $241 million -- sorry GBP 241 million at INR 94.2 and euro through EUR 36 million at INR 82.1. MTM gain, mark-to-market gain on outstanding covers was $69.7 million, as against 30th September number of $68.9 million. Almost the same.Based on hedge accounting treatment that we follow, gain of $17.7 million was taken to P&L and gain of $52 million has been taken to reserves.Cash and cash equivalents as on 31st December were USD 950.1 million that is INR 6,068 crores against USD 913.2 million in September. The cash has improved in Q2, even after payment of $56 million towards purchase of balance stake in Comviva, for which we paid INR 362 crores. So all-in-all, we have delivered another quarter of all-round growth in the revenue, in margin, in profit, in cash flow generation amongst other aspects of improved business.With this, I open the question -- I open the floor for questions. Thank you.
[Operator Instructions] The first question is from Ravi Menon from Elara Securities.
Want to get some clarity on the IP deal. Firstly, what revenue came through this quarter from that? And which segment is it? Which vertical would that be classified under?
Ravi, this is Manoj. So we classified under TME because it's a technology, media, entertainment client. From a perspective of revenue, et cetera, we are not going to specifically comment on what the deal contours are. Suffice it to say, I think from the deal perspective, I think the transaction has been successfully completed. We have got the revenue. We have got the costs in the books, and amortization has started. And as Milind mentioned, just to clarify that every quarter, we'll have to pay about $8.5 million. That payment is also going, in addition to the upfront $35 million. Beyond that, I think from a color perspective, it is in the cloud and virtualization space as we had mentioned before to you.
Right. And you've really got revenue growth from the BPO side. If you could -- and this was the second quarter, I think, we've seen that. If you could give us some color on what drove this? And is this sustainable?
So Ravi, I'll ask Ritesh Idnani, who heads our BPS business. He's on the call to comment on the BPS business and its prospects. Ritesh?
Yes. Thanks, Vineet. Yes. Thanks, Manoj. Ravi, the BPS business had another good quarter, as you saw from the numbers. Quarter-on-quarter, we grew the business at, roughly, about 20% and year-on-year about 24%. This has come on the back of I think very strong execution on our strategy of driving transformation, leveraging technology on the front-office side, that is on the physical customer experience front as well as using platforms, automation, analytics and artificial intelligence on the back-office and mid-office side as well. What we have seen is a broad-based growth across both existing accounts as well as new logos. And several of the new logos that we acquired in the first 2 quarters of the year that started ramping up is what we are also seeing in terms of the benefit in this quarter. That being said, one of the other things that has also helped us as well is the fact that this traditionally tends to be a strong quarter for us as a business. By virtue of the fact that we have a number of retail accounts in our portfolio, and Q3 tends to be the quarter, when the retail accounts, obviously, because of the seasonal ramps end up seeing an uptick as well. That being said, the BPS business has also been recognized in the marketplace substantially. We have been recognized by Everest, a leading analyst firm, as one of the top 3 service providers from a new age KPI that is business outcomes that are driving the digital customer experience bracket itself. We've also got a number of awards, with a few of our clients both in the U.K. as well as in the U.S. markets for outsourcing contracts with the U.S., which again, underlies the strength that we are seeing in our value proposition of using business outcomes to drive superior performance itself. We think some of these themes are secular and will sustain itself and also create competitive differentiation for us in the marketplace.
Okay. And one last question from me about the significant restructuring that we've seen in the IT services period. Do you think there is any more cost that we can take out? Or have you seen the loss of that?
Sorry, Ravi. Your question was about restructuring?
Yes. The IT services, your headcount has come off quite a bit, come back to Q4 2017. So we've seen about roughly 10% of the headcount go off. So is there some more room for improvement? Or again, do you think that from here we should expect you to start adding people again?
I think our focus is really about 2 things. Right. So one is, of course, how nonlinear can we make our services. And second is, what is the utilization number? At about 83%, it is getting to be at the top end of the range. So also from that perspective. So then the next question is, how effectively can we use automation and other areas, where we can optimize value to the customers without actually increasing headcount? So that is our effort. So in my mind, I think headcount is probably not a true measure of growth or lack of it. I think we are looking at it as, how do we serve a customer better by using a combination of partners, our own people and also creating a resourcing model, which is more just in time. I think that's the effort right now. I know it's not a direct answer, but that's the mode we are operating in at this point.
Great. And you said that last quarter itself, you were saying that 81% is quite close to the top of what you can achieve in terms of utilization, but then you've driven it another 200 basis points, which is incredible. But now should we expect that you can go even further?
So it's always going to be a race, right? So I can't actually plan the utilization to a degree of perfection, but I think we are at the top end of the range means the range could be between 82 and 85 or 81 and 85. So it's going to be a narrow range, that's what I meant by that. Yes.
The next question is from Pankaj Kapoor from JM Financial.
Manoj, the amortization that we have taken in the quarter for the IP that's -- if you can quantify that? And is it going to be a straight-line amortization of that 140 that we have paid or you're doing it on a -- as a percentage or link to revenues?
So Pankaj, it is straight line in line with the contract and the rights we have acquired over a period of 10 years. So that's what we've been doing, so which will be roughly about $14 million a year give or take.
Okay. And in terms of the investment to revenue, can we assume it to be in line with similar transactions that we have seen in this space? Or this could be a bit different from that?
Pankaj, I really don't know what are the similar transactions, so you have me at an advantage. I know you had a report out of that. So -- but from our perspective, I think the clear thing is that as we look at the deal right now in this quarter and in the coming few quarters, I've always said that it will drive higher than company EBITDA. And in terms of the cash flow profile, I think we have managed the cash flow profile in such a way that the payments are going to be deferred over a period of time. And with that, I think it was always going to meet some of the metrics we had for the deal. And I think so far so good. We are on track, and that's only thing I can share at this point on this topic. Yes.
Next question is from Sandeep Shah from CIMB.
Just the question is in terms of the telecom. If you look at the core telecom, I do agree this is a seasonally weak quarter. But outlook going forward in terms of any improvement on the deal wins and growth trajectory going forward entering FY '19 or CY '18 will help.
I think, Sandeep, I'll request, Manish Vyas. He's on the call to pick this question up and articulate our comp strategy going forward.
Thank you. Thank you, Manoj. Sandeep, thank you for that question. And you're right. This is historically been and seasonally a weak quarter because of the furloughs and the budget constraints. But to your larger question, which we have also addressed in the past that our strategy of continuing to play on the 4 big technology areas where the transformation will happen across -- and Vineet alluded to those 4 beds. Right from customer experience to the networks to software transformation via DevOps and others. The strategy, indeed, is playing out. In fact, we continued to win a lot of business in these transformation, the change portfolio of ours. If you recall, we had announced our run, change and growth strategy. So that clearly is playing out. And hence, I remain quite hopeful that as the year evolves, both the calendar year and our financial year next year, we will start seeing conversion of lot of this business in the strategic space. Mathematically, we are also continuing to work hard towards, and I believe we are towards the tail end of having seized and cured some of the ailing areas, particularly in the network space. So I do believe that, that we are trending in the right direction. We just have to stay focused on our execution, which we will, in ensuring that we solve more of the problems from a transformation standpoint. The business transformation as well as the technology transformation.
Okay. So Manish, just if we look at the growth numbers of the peers in this quarter as well as earlier versus yours, it looks like there is a solid growth coming in some of your peers. So I do agree there is a portfolio issue, there is a difference in the clients. But are you also feeling a competitive intensity in this vertical as a whole? And is it fair to say that based on your comment, you believe that the FY '19 growth in communication would be higher than FY '18? I'm not asking guidance, but directionally.
Yes. Sandeep, so like you probably rightly pointed out that the segmentation of the customers in the telecom business for others is something that we don't know and I don't believe it is apple to apple. But that said, all I can tell you is that your company is and the team is very focused on not losing any access rights, any market share in our existing business, where we continue to remain a dominant player and a very strong partner to our customers. And that said, I guess, as the spent patterns evolve more towards driving more of the transformation changes. I continue to believe that we are well-positioned to take advantage of that.
Okay, okay. Just last 2 things. Any color in terms of a wage increase even if it's happening for the balance of the wage pool or the employee pool? And when it will happen? It may come in the fourth quarter or beyond that? And second, I think for the Comviva, generally, fourth quarter is a seasonally strong quarter. But being experience of the fourth quarter of last year, do you believe that such bumps can come on a unexpected basis in fourth quarter of this year as well?
Sandeep, I'll take the second question first. So -- and you're right. I think last time there was a surprise on -- and it was probably linked to a specific event happening and clearly, as we all know that event has played out in the telecom market. From whatever we know at this point, I don't anticipate, we're expecting any such thing in this quarter from a Comviva perspective. It remains on track to what we mentioned that surely double-digit margins and growth will be back. I think that's what we are tracking towards. I think, on the pay hike cycle, I think it is going to be effective Q1. And we will probably stagger it over a couple of quarters is this what the current view is.
Okay. So is it fair to say H1 of FY '19 would be the wage hike period?
Absolutely.
And will it be just for FY '19? Or this is like a change of the cycle for the wage hike?
I think you can view it as a change in cycle also possibly. I don't think we have thought that far ahead in terms of what will happen in FY '20. But currently, this is the view. And I think, we'll have to play it. Typically, there's a 12-month cycle. So if you know below 6 years, anyway is on a Q2 cycle, this now. And the remaining of the population will also be covered in Q1 and Q2. And potentially, that might become the new mid-cycle. There is no firm decision on that yet.
Okay. Okay. Just last bookkeeping. The outstanding payment on the IP side would be now less than $100 million?
That's correct.
Next question is from Surendra Goyal from Citigroup.
I had a couple of questions. First question is for Milind. So in quarter 3, if I look at this stand-alone and console, the stand-alone EBIT margins are down 140 basis points, despite a good utilization improvement. On the other hand, if I look at the difference of console and parent then the incremental EBITDA is $50 million for incremental revenue of $20 million sequentially. Could you help us reconcile both? Or why, on the -- firstly, on the stand-alone EBIT margin is down despite good utilization improvement? And secondly, the significant improvement in the EBITDA profile on the remaining business.
There were some one-off yields [indiscernible] on level. And so if you actually -- if I remove that, the stand-alone margins are similar as the last quarter, okay. And the improvement in EBITDA in the [indiscernible] that we had talked about last time in terms of closing some of the businesses, which were unprofitable and which we did in our networking business and that's really playing out, okay. And there is enough reduction on account of selling off Pakistan business of LCC in the last quarter.
Sorry, I missed the first part. Could just talk about what one-offs were there in the stand-alone business?
There were certain one-off charges and provisions which we had to take in the stand-alone numbers. These didn't have any impact on consolidated numbers, but they had impact on the stand-alone number.
Okay. And so the point you made on the remaining business. So this $20 million growth sequentially came despite rationalizing some parts of the business?
That's right.
Surendra, let me clarify that a bit more, right. So from a perspective what happened is, if you know that typically, in most of these countries there are relatively high closure-related costs, which typically have to be accrued that this day you decide to discontinue the business. So some of those closure costs were there. Secondly, of course, and I mentioned, alluded to this in the answer before. I think the Comviva trajectory is on track. And so there has been an increase in margins even on account of that. And typically, in that business, it is disproportionate to revenue. And lastly, I think for the same revenue because of some other reasons, some of our other subsidiaries including Brazil, for example, has flung from a loss to a profit. So all of that has contributed to a strong performance across some of our subsidiary companies, which is reflecting there. And the stand-alone, as Milind said, even in a furlough-related quarter has been flat if you adjust for those write-offs, which have not impacted the consolidated numbers. So it is more in the nature of investment write-offs and so on and so forth. Yes.
Sure. And secondly, again, for Milind, as per the release, if I add back the INR 253 crores of excess tax provisions for the 9 months, the tax rate seems to be close to 30%, 31%. So firstly, is that right? And secondly, if that is right then what tax rate are we looking at for FY '19?
I'm not really sure, what is...
Sir, we are not able to hear you?
Sorry, Milind, we are on mute.
So not really clear what this INR 253 crores write-back you said, our tax is...
No. No. Sorry, I am talking of the excess provisions written back, which have been given in the notes to the accounts, which you have shared with the exchanges and with us. So I think it's INR 225 crores for this quarter, if I remember right, and INR 253 crores for the first 9 months. So that is the number I'm talking about.
So exchange, normally the numbers would be in rupees, lakhs, so let us look -- I mean, let me just look at that number. It's not...
So Surendra, we'll come back in a few minutes. Let's look at -- I don't think there's such a large number out there. No, maybe there's a conversion error on that.
Tax rate, I mean, cumulatively is in the range of about 24% in line with what it has been in the past.
So could you share the outlook for FY '19? And then maybe you can come back on the other part?
FY '19, what is the expected tax rate?
Yes. I mean, they should be in the same region. I mean, it's difficult to really predict the exact number, but I don't really expect any major change there.
Next question is from Vibhor Singhal from PhillipCapital.
Sir, my question was mainly, I mean, there are a couple of -- a few data points if we collate them, so my question is more on the operational front. So if I look at the current business right now, I mean, we are operating at around 83% utilization with and without trainees, so absolutely almost a 0 bench strength. So that's the bench strength that we have. And on top of that of course, I mean, the salary hikes for the last year and this year have been delayed and have been staggered in the sense that we've not given any hikes to people with more than 5, 6 years of experience. And along with that, we've also had 3 consecutive quarters in which we have reduced the workforce in the software division. So do you anticipate some sort of problems in delivery because of, let's say, the employee morale going down because of people being laid off, salary hikes not coming in? And also at the same time, you don't have enough bench strength in terms of 0 bench as we see from the utilization levels. So is it not kind of a precarious situation that we have got ourselves into in which, if tomorrow, we get good, I mean, large contracts, we might not be able to execute them and there could be some delivery issues as well?
I think overall, fair and valid point. So probably let me go one by one, right. So from a perspective of salary hike, as you rightly said, about 6 years we did not...
Sorry to interrupt, sir.
There's some background noise. [Technical Difficulty]
[Operator Instructions] Sorry, for the delay ladies and gentlemen, we have the management line reconnected now. Sir, you may please proceed.
Yes. Sorry for the interruption. I think I was covering this question. So I would answer the question in 2, 3 parts. So the first part is that I think you're right that the salary hikes were not there. But I think from our perspective, the way we have thought through this is that it is done by a combination of many things, including -- if you look at our utilization, it was about 76%, 77%. So I think the reason some of these changes the way we brought it about is just tightening the operations and using automation and so on and so forth. From an ability to manage growth and delivery, I think the evidence, at least, shows that we have been able to manage growth over the last few quarters, in spite of all these other changes we are making. And last, but not the least, I think as we have done this, I think there have been a slew of initiatives in terms of retraining, reskilling and changing the organization profile, introducing technology, introducing platforms in our delivery, which has helped us achieve some of these results also. So I think the combination of those 3, while what you say is potentially a technical risk, at least, we don't perceive it. That would be something which would come in the way of our growth. And I think, we have evidence to show that to a certain extent.
I just have one more bookkeeping question. In this quarter, we've seen the debt in the balance sheet also go up by around INR 500 crores, including, of course, the long term and the short term. So would that be for the Comviva acquisition?
Sorry, are you looking for the consolidated debt or stand-alone debt or...
Yes, consolidated.
Consolidated is not up INR 500 crores. Are we looking at the same...
$20 million.
I think -- are you saying Y-on-Y or Q-on-Q? Did you say year-on-year or quarter-on-quarter?
No. I'm sorry, I think it's on the March numbers. That's clear that it has increased.
Yes. So I think we have been using debt on a -- basis. So HCI, we did an acquisition. Comviva, we did an acquisition. Anyway I think, debt is available at fairly reasonable rates. I think -- but if I look at the net cash position that's gone up, in spite, of that is what my view is if I compare March. And you can double check that.
Right. I mean, I completely read that the cash flow generation has been such that our net cash position has definitely improved. So but -- if there's any reason that despite we having so much cash and investments on our balance sheet, we're still going for debt financing. So -- is the debt -- does the mathematics work out so very well in favor of taking debt for acquisitions?
No. I think it's a question of where and is the debt required. It's a question of overall treasury management, right? So that surplus could be somewhere, the debt could be somewhere else. And that something will be managed as a global treasury funds, right?
[Operator Instructions] The next question is from Girish Pai from Nirmal Bang.
Can you share the large deal TCV number? And how much would this be renewable versus new?
So Girish, we consistently report -- whatever we report in the press release that's all new deals, first of all, right? And this quarter, I think, we have reported about 11 or 12 deals, I think. It's about $300 million.
$300 million.
Yes.
Okay. The other thing I wanted from Milind was you mentioned about 180 basis point improvement in EBITDA margins quarter-on-quarter. You mentioned certain components to it. Can you put some numbers on that? I mean how much was utilization, how much was improvement and profitability of subsidiaries contributing and stuff like that?
So I think the normal rules apply. So if I look at it Girish, utilization was up about 2 percentage points. So you can use the metrics, right. And then, we had some benefits from the business and exchanges because some of the low-yield business went away. I would put it as 1/3, 1/3, 1/3 loosely, right? It's not a very scientific answer, but that's the way you should think about it.
Okay. My third and last question is on the LCC front. How are things panning out from a margin perspective?
I think as I answered before LCC, probably has turned from a loss-making position to -- it has made a low single-digit margin. So clearly, as we had mentioned even last quarter that the turnaround will come in the second half, that's happening. And I think there was a question before also. The last 2 quarters, we also took closure-related costs for the LCC business and for some of our other businesses, which are no longer in play. So what we are looking at is probably the normalized margin today of the business is low single digits for LCC.
Next question is from the line of Sandip Agarwal from Edelweiss.
I'm not sure if C.P. is on the call, but if he is not there then someone else can answer this question. So 2, 3 quick questions. How is the scenario changed on the 5G CapEx? Are we seeing some green shoots there? Any intent to spend in its -- or some increased momentum there because probably our comps will get a big kick if that happens. And secondly, on the manufacturing side, although, this was a furlough quarter what is your sense? How are things changing? And is non -- are non-U.S. markets -- non-U.S., non-Asia markets showing significant traction there? So these 2 questions if answered will be very helpful.
So Sandip, C.P. was not feeling well, so he's not here. But I'll ask Manish to answer the first question on the 5G and what is the view there? And then Manoj Chugh to answer later on manufacturing and what is the outlook and what is the traction we are seeing.
Yes. Thank you. Sandip, on 5G there is an increasing activity level that is happening across the industry. More so in the western markets at this point in time. But it is still at a point where there are trials under where a couple of markets have announced a few field trials. There is still so much more to be done in terms of finalizing the standards. As you know that in couple of weeks the entire industry meets in Barcelona at the global Mobile World Congress event. And that is where lot more discussions is likely to happen about the speed and the formats and the standards. We anticipate that, and we have said this in the past as well that over the next 4 to 6 quarters, we will start seeing initiation of some of the -- at least couple of larger rollouts. However, that may even play out in more like 2019 than before. So the jury is still out, but it is very clear that the industry is looking at 5G and the 5G rollouts as one of their top priorities right now.
Okay. That's very helpful. And on the manufacturing side if...
Yes. Manoj Chugh?
Yes. Manoj Chugh here. On the manufacturing side, as you've seen, we have some [indiscernible] quarter-over-quarter growth. The last quarter was no different. I think the business continues to do well. Our focus and you spoke about different markets is around 3 specific debts if you will. One is around smart products, which are driven by IoT and manufacturing analytics and then Factory 4.0. We continue to see good traction around Factory 4.0 in markets outside U.S. and Europe.
[Operator Instructions] The next question is from Shashi Bhusan from Axis Capital.
In communication vertical, we have a strong service offering across CapEx to OpEx and obviously you turnaround in LCC as well. Now with some 5G CapEx at side like AT&T committing $1 billion for the same, can we expect double-digit or high single-digit FY '19 exit rate? As we have seen in the past to some revenue acceleration when the first CapEx kicks in, in the vertical?
Manish, do you want to pick up that question?
Sure. Shashi, all I would say is, [Foreign Language]. I think we remain very clear and focused on the strategy. Like you rightly pointed out, I think the indicators are both internal and external. However, I would want to caution that externally it is not that the overall spends are going to be anyway higher than what they have been in terms of the absolute values. The service providers continue to remain very watchful about where they spend and how much do they spend. It is obviously a correlation with their revenue cycles. So -- but that said, clearly, the need of the hour for the service provider is to continue to digitize themselves faster than ever before because that their level-playing field has changed dramatically. People who they compete with and the customers that they serve and the manner in which they serve. So those lead indicators are clearly driving and will drive a series of digital transformative initiatives, which really is what we have been focused on in investing in, both in our customer relationships as well as from our portfolio standpoint. And that's what we continue to do as that translates into what exact level of growth remains to be seen. I won't be able to pinpoint to an absolute number at this point in time, but that's what we see as our strategy evolving, Shashi.
Okay. Some of our peers have indicated on an overall basis, a stronger FY '19 compared to FY '18. What is the level of confidence we have for the same?
Your question is related to just telecom or...
Over -- no, no, overall. I mean, enterprise, telecom combined, I mean, in terms of deal pipeline, deal disclosure discussion with our clients, IT budget, pitching upon all these things.
So let me pick that up. So from our perspective, clearly, there are 2 parts of our business. The enterprise business has been doing very well. And our goal, our targets will be to continue that kind of a growth rate. From a communication business overall things, whatever Manish is saying, I think we have set up for a better year and our targets would be to grow faster because clearly speaking, there has been certain positions of our business, which we have discontinued for various reasons. And that is something as an event, we don't see it happening in the future. So from that perspective while the number might be lower for communication compared to enterprise, but we do anticipate that both business will grow. That's our view.
Sure. On the margin front, we talked about our margin improvement generally, to continue for few more quarters. Now are we seeing the trend to continue for the at least next 3, 4 quarters? And what would be the driver for the same?
I think when I spoke last quarter also. Reality is that none of those levers have changed. The levers remain the same. So I think clearly, even with this improvement there is scope to improve further on our -- I think there is a bit of background noise, operator.[Technical Difficulty]Okay. So the second, clearly, is I do believe that our whole benefit around automation and looking at our processes in a wholly different manner and figuring out what is the new age delivery model, I think that's going to deliver some benefits into the future. And thirdly, I think clearly, there are discussions around how do we claim the mix on-site versus offshore and discussion around value sharing with the customers, which I think I've always said, is the toughest measure. So what I'm probably reiterating is that our goal would be that the journey has not changed. But clearly, we have had a good start. But I think, our goal remains the same that we would want to continue this journey into the next few quarters. And the only qualifier I always add is Q1 potential is our weak quarter because H1B and Comviva, both hit us during that quarter.
Next question is from the line of Ashish Chopra from Motilal Oswal Securities.
Just one clarification. The sharp growth in BPO in the last 2 quarters, could you just elaborate in from which verticals or which industries are driving the same?
Sorry. Could you repeat the question, please? I...
Yes. My question was the growth in BPO over the last 2 quarters. Just wanted to understand the industries where it could be coming from, the BPO growth?
Ritesh, you want to pick that up in terms of what is the growth?
Yes. To your question, the growth has been coming across the communications vertical, manufacturing, retail and the BFSI space.
Next question is from the line of Neerav Dalal from Maybank.
Most of my questions have been answered. Just wanted to know what could be the size of health care at the moment because it's been -- others have been growing every quarter so...
I don't think we have specifically ever disclosed health care. When it becomes a reasonable size, where we carve it out, we will do so. But it is growing because I think 2, 3 things are happening. I think clearly, on the life sciences vertical some of our solutions -- digital solutions are doing well. And then on the provider space, I think we are -- some of the deals, which were in the funnel, we are starting to convert those. But Manoj, do you want to add some more color on health care?
Yes. I think our focus around patient management and engagement, I think that is the theme that continues to do well for us. On the peer side, we have seen some large deals. We've also made an announcement this quarter. So I think all engines of this cylinder are firing for us life sciences, payer and provider. And I think we're at the right place with this vertical. And we'll continue to put our focus here.
Next question is from the line of Sandeep Shah from CIMB.
Just a question in terms of the retail. Generally, seasonally, it's a good quarter for the retail as a segment. But this quarter, it looks like that despite the BPO bumper revenue growth, the retail revenue growth has been almost like a flat. So what has caused this? Are we also in line with peers facing some headwinds going forward?
So Sandeep, I think, see, first of all, it's a very small vertical for us, so extrapolating might not be the right thing. But I think, practically what has happened is one of our projects, which was in Q1 and Q2 has ramped down. And Q3 had the seasonal ramp up. But I think that one project is causing this anomaly. But otherwise, I don't think you can read too much into it. But as I said, it's a smaller vertical for us.
Okay. Okay. And similar question on the BFSI, I think you done excellent in terms of the growth on the BFSI even on an organic basis last year. This year, if you look at the Q-on-Q growth trajectory has been slowing down at a fast pace. So what to read about this here?
Manoj, you want to pick up BFSI?
Yes. Thank you. I think Q3, in particular, is more of a specific one-off project, which has come to a closure. If you look on a year-on-year basis, BFSI in Q3 has again, demonstrated double-digit growth. So I think you shouldn't read too much into a specific quarter number. The trajectory continues to be strong. And I think Q3 was an exception.
Okay. Okay. And just last question, I think, Milind you said the tax rate one can expect at a similar levels in FY '19. So this, you after incorporating the U.S. tax reforms especially, the BEAT tax provision. If you can give us some color on the same, will be helpful?
So the BEAT, we have considered the BEAT tax provision. And it will, I think, what -- currently, what is known as in terms of interpretation of various provisions, our tax rate would marginally go down from 35% to somewhere in the range of 30%, 33%. Then, during this quarter because the statutory rate has come down, there was -- there has to be a, we had to take a write-down on the deferred tax asset, which we're creating in our U.S. subsidiaries. And that impact, we have already taken in Q3. So going forward, therefore, I said, we really do not any -- expect any major tax reductions. I mean, the tax rate would remain same at level of about 34%, 24%.
Okay. Okay. And just Manoj, like we had a high-client concentration. And last year, in the fourth quarter, one of our large client has renegotiated the pricing. Are we forcing such risk going forward, which may come on an annual basis because of the deal renewals?
Sandeep, as of now, there is no such risk we foresee because, I've said this before that we have gone through multiple rounds of negotiations with...
Sir, we are not able to hear you?
Sorry I said I have -- we have gone through multiple rounds of negotiations with most of our customers, so we don't anticipate that risk coming through. I think on the tax point, I had owed, Surendra, a clarification. So I think the tax credit is because of 2 or 3 things. One is, of course, there are certain R&D claims et cetera, which have been a credit this quarter. And then, there has been MAT liability, which has been written off. Now that has been compensated by almost equal write-down on deferred tax assets. So the net impact of that is a reduction in the effective tax rate to about 20%. That -- so it's a combination of 3 or 4 things. But the net impact is about -- the tax rate has gone down by 4%. So that's why we are saying the regular tax rate will be about 24% to 24.5%. So I think that was the clarification, which I think, Surendra, was asking for. I just wanted to give it to -- for everybody on the call.
Ladies and gentlemen that was the last question. I now hand the conference over to Mr. Bhat for closing comments. Over to you, sir.
Thank you. Thank you, everyone, for joining our call. If you have any queries, Vikas and I are available to address it offline. Thank you, again, for joining us. Thank you.
Thank you very much members of management. Ladies and gentlemen, on behalf of Tech Mahindra that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.