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Tech Mahindra Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Tech Mahindra Limited Q3 FY '19 Earnings Conference Call. [Operator Instructions]I am now glad to hand the conference over to Mr. C. P. Gurnani, Managing Director and CEO of Tech Mahindra. Thank you, and over to you, sir.
Good evening, good morning, everybody. Thank you for joining the Tech Mahindra Quarter 3 FY '19 Call. As you all have the results right in front of you, to me, it is a milestone quarter for Tech Mahindra Associates. It is a milestone quarter that we clocked $161 million run rate, which effectively means that we have finally crossed the analyzed $5 billion revenue run rate. The other salient point for me here being that growth has been good, robust, both for Enterprise sector and Communication sector. And you've seen that Enterprise business was up 4.1% quarter-on-quarter. Communication business showed a positive traction and grew 2.6% quarter-on-quarter. So overall, good results on margin front and L. Ravi and his team have delivered 50 basis point growth on the back of high focus on automation, high focus on R&D, which are automation tools. And in general, I'm quite happy with the way we have signed the deal and the way the focus has gone.More important to me is our digital revenue, our revenue through the TechM Nxt platform. TechM Nxt platform, as you know, is a combination of established companies and companies like Altiostar or like the cloud-based, where we have either invested or collaborated to create a whole ecosystem.Further, just a quick update is that Ritesh, who was handling BPS and who has shown spectacular results has now been given an additional responsibility of handling the platforms. All the digital platforms, software-as-a-service, now comes under Ritesh Idnani. Along with his BPS responsibility, Manoj Chugh, who has had a lateral move to Mahindra & Mahindra, his responsibility has been taken over by Jagdish Mitra. Jagdish Mitra is on the call, but I consider his job to be more of harnessing the energies of the Communication sector as well as the Enterprise segment because our world of connected experiences, connected solutions and connected markets can only happen when we harness our energies together. So you have Manish Vyas, you have Harshvendra Soin, our Chief People's Officer, all of them on this call. And unfortunately, I won't be staying through the call, but Ravi will officiate for me, and between him and Manoj Bhat, I think they will marshal the company resources to answer any questions you have regarding our company.So thank you guys again for the confidence, and thank you again for seeing the company continuously deliver 7 quarters of margin expansion and to some extent, a revival of the Communication sector.So I'm going to hand it over to Manoj to take you through the results in detail.
Thank you, C. P. So good evening to all of you. I think as you see from the numbers, growth of about 3.6%, and was -- and so our revenues are about INR 8,944 crores. The cross currency impact was about 80 basis points. So on a constant-currency basis, it's about 4.4% of growth.I think if I look at Enterprise, of course, grew 4.1% Q-o-Q. Comms was up about 2.6% Q-o-Q. One thing to highlight is our digital revenue move to about 33%. So it's a 10% sequential growth. So clearly, our efforts and our strategies and our investment and also trying to put together the TechM Nxt strategy in terms of offering the latest from -- through collaborating with several partners has really showing ultimate results in terms of growth in the digital revenue.Moving on the margin side, clearly, I think margins went up about 50 basis points. I think predominantly, it came from some improvement in our operational expenses on the SG&A side, and also about utilization, which was helping to the tune of about 40 basis. And really some of the headwinds, I think I wouldn't call them headwinds, I think that our investments in terms of the deal ramp-ups, because I think in last quarter, presumably Q2, we had deal wins of $550 million, and this quarter we have had deal wins of $440 million. So all of them I think the deals in transition that the second is, of course, the business mix has changes and this is causing some negatives on the margins, which will start to come through when we're -- cycle converts to revenue as we go forward and the transition is complete. I think on the other point, other income was about $11 million, which -- or has a Forex loss of about $11 million compared to a gain of $7.4 million in the past quarter. The primary reason is, of course, the sharp appreciation of the rupee during the quarter.Coming to tax. The effective tax rate is down to about 18%. During the quarter, we had some tax reversal, which actually gave us a benefit of about 7.5% on the effective tax rate. So on a normalized basis, tax should be about 24.5% or so in terms of tax rate. Other than that, I think on the -- coming to the balance sheet side, I think our DSO was down about 5 days compared to the last quarter to about 106.Consequently, free cash flow was very strong at about $161 million, which is about 94% of PAT.Cash and cash equivalents were about $1.25 billion as of the December quarter. In terms of the hedging strategy, I think we continue to follow a consistent strategy and the hedge book was about -- total of about $1.56 billion. Just to reiterate, we go up to 2 years and we cover up to 75% of our exposure on the basis of a rule-based strategy, and that's what we have been doing consistently for several quarters.So from a -- almost all perspective, it's been a quarter where there's been growth and there's been operational improvement. And then we have also managed to actually do some improvements on the balance sheet side. So it's been a satisfactory quarter. With that, I'll throw the floor open for questions.
[Operator Instructions] The first question is from the line of Ravi Menon from Elara Securities.
Yes, seeing anything feel sharp with absolute terms on our percentage of revenue, I think it's the lowest it's been since FY '16. Do you expect more SG&A leverage or should we now start seeing some more in some marketing investments or something else?
So our endeavor, Ravi, would be to keep SG&A between 14% and 14.5%, roughly. So it could be a marginal uptick. But the small quarter-on-quarter variations might happen. So I think from a -- it'll be a good assumption to take a range between 14% and 14.5% for SG&A because there will be some investments we make as we go forward.
Okay. And the ROW revenue seems up very strongly. How much of this was due to the 5G deal with Rakuten? Are you sort of a [indiscernible] or you have anything else if that's the...
No, actually, it's not one reason. If I look at the ROW revenue, of course, Comviva has a strong quarter, a lot of the revenue comes from the ROW region. Second is, I think as you correctly said, deals like Rakuten, if I look at some of the other deals in APAC, I think there has been ramp-ups on that on the Communication side. So it's a combination of various reasons, which is causing this ROW growth to be high, not one single isolated event.
Great. And attrition seems to have a high impact on personnel costs, including things like [indiscernible] for the rest of the employees also being rolled out. If you could give the other impact of that?
So our wage cycle is in the June quarter. So we've not worked out a number. But Harsh, if you're on the call, can you talk about some of the measures we are taking on attrition? And while it's always a challenge to manage, but I think from a planning perspective, we have already assumed -- always assume a slightly higher number. But Harsh, if you have...
So Ravi, before Harsh comes in, I can only say is that, to me, wage hike, it'll not be something which I would consider it as an unusual phenomenon. Sometime during May also, we would decide what the exact rate increase will be, we're obviously going to take the industry trends into account. But our overall focus on operating metrics, our overall focus on correcting the pyramid, our overall focus on rotation, I think should offset some of the cyclical expenses like wage hike. But Harsh, you go ahead and share your part.
Yes, thank you. I hope I'm audible. So basically, what we have seen is, due to the upticks in the IT sector, this has lead to an improved job market, where we see most of the organizations on high attrition levels. We have our own detailed [ SGY ] plan to address it. However, it's an important point to move that our attrition of high performers is experiencing much, much lower. And I think that's a very healthy sign and so that is something that is very heartening to see, but our high performers are not really being affected. So that's what I will completely agree with.
The next question is from the line of Sandeep Shah from CGS-CIMB.
Just wanted the breakup of the TCB of $440 million, if you can break down in the Communication and Telecom space?
So about $240 million or so is Communication and about $200 million or so is Enterprise.
Okay, okay. And Manoj, the full year outlook for the Telecom, are we still saying flat to a marginal growth for the full year because that requires as big as 7% to 8% Q-on-Q growth in the fourth quarter for Communication?
So I think if you look at the currency movements, I think and I see, it's a bit of math there. But clearly, I think more than anything else, I think we do expect that the momentum, because of the deal wins, there will be momentum going into the fourth quarter also in terms of the Communication vertical.
Okay, okay. And can you give some color in terms of the type of wins of this $240 million? Is there retraction coming through 5G related? Or is it more to do with what we say that preparation before the 5G is being rolled out?
So Sandeep, what I'll do is, I'll request Manish to comment on the -- what we are seeing in the market and also the type of wins we have had. So Manish, if you can please?
Absolutely, Manoj. Sandeep, thank you for the question. No, you're right, on the second one. These deals are -- have 2 characteristics to them. One, they are a bit widespread, in the sense they are cutting across our digital network and the software transformation footprint; and two, in many ways, they are all in preparation for the upcoming transformation, which is 5G and/or even before 5G, whatever transformation will happen on both the network as well as on the previous model site because as you know, 5G is still being tried and trialed in many major Tier 1 operators at this point, mostly in the U.S. and few other parts. So we still have to wait for some more time for the uptake on that one. But otherwise these deals in -- for all practical purposes, are transformative.
Okay, helpful. Just last question. Manoj, where are we in terms of a margin journey? Can you give us some brief? Because do you believe the large deal ramp up cost may continue and your gross margin may continue at a current level? Or you believe that gross margin has an upside potential and the margin up journey may continue going forward?
So Sandeep, as we had mentioned that there'll be a 6- to 8-quarter journey of margin improvement. And I think we have met that 7 quarters. I think our goal would be to increase the margins, but clearly, I think the levers will be different. So there is upside, but of course, there are some adverse measures also. So to me, I think the goal would be to try and see where -- what we can do more. But given how much we have achieved, I think, the pace might be a lot slower and much more muted. And then we keep updating you as the quarters go by, but clearly, the initiative is set off to do about 7 or 8 quarters ago, I think that's obviously showing results. In terms of some of the levers, of course, I think the business mix and deal management and as more digital revenue comes in, there are some positive levers there. Second is our portfolio companies synergy, and that -- how that impacts our margins positively. And clearly, when we look at the entire workforce file as well as the locations and more importantly, the locations on-site and offshore, those are things which we need to probably find some more. And of course, on the other hand is the wage hike. So I'm not giving you a number, but I think directionally, that's where we are headed or that's how we're thinking about margins. Yes.
Okay, okay. So just follow-up, Manoj. Do we believe the on-site supply side issues which has been highlighted by many companies, will it be a new headwind even for Tech Mahindra looking at the demand uptick? Or you believe it's already a known headwind and we can manage it going forward?
I think, ultimately, if I look at that full phenomena of talent, I think the recovery of that through increased realization, follow with a lag I suppose. So there will be -- as we go through that journey, and this is in, I think isolated pocket. That's something which we'll have to closely watch. For now, it's probably -- but it's not a very severe impact for us so far.
The next question is from the line of Ashish Chopra from Motilal Oswal Securities.
Manoj, firstly, could you throw some light on the roughly $1 billion odd worth of deals that you've won in the last couple of quarters as to how would it split between maybe your largest customers versus the smaller ones or the new ones? Because I think despite the ramp up, we don't see that kind of growth in the top 5 in this quarter. So just wanted to know how these deals would split and what can we expect from the top customer bracket.
So I mean, I don't have a full analysis in front of me, but let me try and give you some color. I think clearly -- I think in our top customers, there is going to be a pattern which will be different quarter-on-quarter, I would presume. But clearly, a lot of the wins have also come outside the top customers and that's the quick answer I can give you. But unfortunately, I don't have all the $1 billion deal's worth. But Manish or Jagdish, you want to give some color if you have in terms of where do we see opportunities, Jagdish, on the Enterprise side? And maybe Ritesh can follow with something on the BPS side?
Sure, sure. So we look on our perspective, Ashish, there's a few areas that I think it's in a trend. And actually, as Manoj said, cuts across existing as well as new customers. For example, a lot of this is either digital-enabled transformation or digital at the heart of it. So depending on the verticals of the industry and the market that we're operating in, different levers. So manufacturing has a lot of levers in terms of factory of the future and then in smart workforce and so on and so forth. On health care and banking and retail have a lot focus on the analytics related to the retail customer experience. So we've had -- even fairly large deals coming in from verticals which are not exactly amongst our top 3, but probably with some logistics and utilities and so and so forth. So it's actually quite wide spaced. It's driven primarily by digital transformation. And now slowly we are starting to see that the digital transformation deals are no longer small, but starting to be at the core and clearly large, and the large in the sense they are sometimes coming close enough to double-digit million-dollar deals. I hope that answers your question.
Yes, that's helpful. And if I may just ask this maybe in a slightly different way. If deals are actually bifurcated between both large accounts and the smaller ones, would there be a couple of accounts maybe in our top 10 list who -- which are maybe sizing downwards? Which could explain the offset from them? Or would it largely be broad-based attraction across?
So I think, see, the nature of large accounts is they grow in step function. So you will have periods where 1 or 2 accounts might not be growing or -- so that's a mixed portfolio. So that's what I'm saying that from our perspective of our largest accounts, every quarter, you will see some slightly different behavior. But overall, I think that we believe that whatever we are doing in terms of digital, in terms of our run change growth strategy as well as in terms of overall growth, I think it is balancing itself out across the portfolio.
Okay. And just one last question from my side. So based on the order book now that you have after these deal wins, how should we look at the trending headcount going forward, especially on the base of a fairly sharp cut over the last couple of years in software headcount, like a significant growth in BPO? Could we expect more of the same or do you expect the headcount growth to be more balanced across these 2 segments?
So I think I will ask Ritesh to step in on the BPS, please, because obviously, BPS has done extremely well for us. So Ritesh, you want to talk about what's happening there? And then how are we thinking about the question around future growth and will it be headcount led or not?
Sure. Thanks, Manoj. So thank you for the question. I think BPS over the last 2 quarters has had exceptionally strong growth. We have had double-digit sequential growth, 13% in Q2 over Q1 and about 11% in Q3 over Q2 quarter-on-quarter. And while continuing to maintain industry-leading profitability, I think the key thing to bear in mind there is that, it's a strong validation of our value proposition in the market mix, particularly around being a leader in customer experience. And given that, that's the boardroom priority, our proposition of using technology to drive transformation in the front office and acting as the catalyst for one office transformation itself is resonating well in the marketplace. That is resulting in us winning business, both from large Global 2000 companies as well as digitally native organizations as well. And one of the things that we are seeing in the current technology and shifts that are playing out in the marketplace is also a share shift away from pure-play, contact-center companies, who may not necessarily bring the technology to that extent. What does that translate in terms of headcount? We are creating what is a digitally human workforce. So while on one hand, this quarter, we added upwards of 4,000 people quarter-on-quarter, and then close to about 8,000 people over the last 2 quarters in the business. We've also continued to expand our footprint of bots in the workforce, where we have more than 4,500 bots in the workforce today. And given the productivity that these bots bring to bear, which is about 2.5x the human productivity, that's a substantial part of our total organization. So today we are up to -- close to about 44,000 people in the workforce, and what I do see is that the demand environment continues to be robust as people keep looking for opportunities to infuse technology in the way they run their front office, but also their overall one-off is including mid and back. And they're looking for a technology to play a pivotal role to drive their transformation. And I think, TECHM and BPS organization there has a pivotal role to play in facilitating that. And that's something that I think we are being net beneficiaries of.
The next question is from the line of Pankaj Kapoor from JM Financial.
Manoj, just wanted to get a sense in terms of our headcount addition in IT services side. It was down almost 750 quarter-on-quarter. So I was curious to understand what's happening there? Is there any kind of a one-off thing which happened in terms of transfer out of some headcount that we had acquired earlier which led to this kind of a fall? And the related question to this is that given the utilization which is now running almost at 83%, 84%, how do you see the headcount scenario going forward?
Thanks, Pankaj. So I think on the headcount, clearly, I think there are 2 trends playing out. I think while the headline number is the headline number. But clearly, I think and I had mentioned this a few quarters back also, that as our automation platform starts maturing in each of these customer engagement, we will start seeing some benefits of that coming in terms of resources and people being available to be redeployed. So some of that is happening. Second thing is, of course, I mean, the decline might be a temporary timing kind of thing. So while there is no specific event which comes to mind. But on an overall basis, I think from an IT perspective, the -- so we do believe that we have done some work in the automation side and our platform is installed across most of the customers. But clearly, there are some more benefits to come through. And the second thing is that, I think from a model perspective, we've also been using subcontracting as a number which -- as a balancing factor, and that's been historical also. So I think that's the way to look at it that we are managing this through a combination of both of these.
Got it. But if look at the subcon cost also, that seems to have come down quarter-on-quarter, which is quite in contrast to what the other players are seeing. So again, was curious to see what you're doing different over there?
So on the subcon cost, I think the way we classified it is, there are, obviously, resource-based subcon and there are task-based subcons. So in many of our implementation kind of engagements, there might be turnkey subcons. So there will be some quarter on fluctuation on that. But if I really see, overall, maybe our subcons, as a resource base, might have gone up during the quarter.
Got it. And then just lastly on the margin outlook. So you mentioned the headwinds of transition in the large deals which will continue. Any kind of a quantification around that, like where you see margin stabilizing? What could be the kind of a target margin brand that you're looking at which you'll be more comfortable with on a steady state basis?
So Pankaj, we don't want to obviously guide any margin brand. So -- but clearly, from our perspective, it is something which we keep continuously working on to find opportunities which can obviously benefit the customer and benefit us. So I don't really want to put a number to that. But clearly, as I said, it is both growth and profitability are equal weight, I would say, as we think about the quarters going forward.
The next question is from the line of Diviya Nagarajan from UBS.
Most of my questions have been answered. But just a follow-up to the headcount question on software versus BPO. This is a trend that we've seen in the last several quarters that there's consistent drop on the software side and increase on the BPS side. How should I think about how -- what this means to your links of producers between these 2 segments? That's question number one. And number 2...
Diviya, I'm sorry to interrupt. Your voice is breaking. It's sounding a bit muffled. If you are on speaker or on a hands-free, just take that off.
Not. Is it better now?
Yes, thank you.
Yes. So my question on -- was on the trends and the headcount in software and BPS, decline in the former and increase in the latter for the last several quarters. My question was, for the medium to long term, what does this mean for your business mix? Could you help us understand that? Question number one. And two, on the outlook that we are seeing for contracting, I think the last few quarters, we've definitely seen a pickup in contract wins. How do you view that continuing against the macro backdrop that we're seeing right now, especially in some of your markets that you're looking?
So I think on -- Diviya, on the headcount question, clearly, and I'll refer to the revenue side. So while, of course, BPS has grown very nicely, even IP has grown for us in terms of revenue. And as I said, I think it is a balancing act. So over a period of time, I definitely see this headcount going up as the revenue goes up. But it's something which, from our perspective, as I said, there are 2 or 3 factors, one is, what is the redeployment possibilities? Second is, how do we think about our partner ecosystem and our collaborative efforts through them. And then, finally, in terms of our campus recruitment program and people added there and how do they come into the workforce. So -- but over a period of time, I will -- I do see it increasing. So on the other question in terms of market and deal momentum, I think the best thing would be, I would ask Manish, probably to talk a bit about comms and how we see the market from that perspective, and what our communication service providers thinking about in terms of investment. And maybe, Jagdish, if you could give a flavor if you can on the other side of some of the other verticals. Manish?
Yes, sure, Manoj. Yes, sure, absolutely. I think these are the investment cycle in Telecom is largely built around continuing to strengthen their network. I think everybody, without exception, realizes that there is still enough value, enough oil in that pipe. And with this 5G and more dynamic type of networks coming through the door, clearly, everybody is focused on ensuring that they don't drive that investment up. Now that does not necessarily mean massive new CapEx, there will be a lot of repurpose and some new CapEx that will happen. The second type of investment that is coming is -- and some of the deals that we are signing are indicative of that -- are about putting together a digital platform for customer management, for supply chain management, for device and inventory management, and essentially, on the entire ecosystem that will have to change around the digital footprint. And the third is around automation. Because there will be a very strong need to continue to drive the cost down in major markets where the revenues in the industry are still going to be -- the revenue growth in the industry is still going to be sluggish at best. And hence, they will have to find better free cash flow and better office-type investment. Which -- the good news is, if you read all these three things that I said reversed, actually align with what we call as RUN, CHANGE and GROW, in the reverse order. Which is to find more cost via automation, to find more speed and velocity of transformation, and to find more growth opportunities via leveraging and harnessing the power of their core asset, which is the network. There, of course, are other investments which are in the Value Added Services space, whether it is IoT, or the industrial Internet. But they are more -- very specific, there is, I wouldn't call -- they call specific trend that is cutting across the industry. It varies between company to company in terms of their relative strength and vice versa. I hope that answers your question, Diviya.
Sure. So this is Jagdish. So similarly, on the Enterprise side, I think [indiscernible] have different flavors, as I mentioned earlier, that are driving business clarity. So for example, in the manufacturing, it's a lot of smart products or consumers. There's a different -- definitely a direction towards shrinking the whole product development cycle which is obviously requiring significant amount of investment, which is in the smart products. And -- but then you have to well enable those things in some of these because of our investment into companies like [indiscernible] and BIO, which, I think is quite [indiscernible] in a part of designing what is connected products and smart products. And that is [indiscernible] in the space. On the workforce, I think there is a significant amount of work that's happening, especially data and over the manufacturing and which [indiscernible] about 150 million of blue-collar workers will retire in the next 10-odd years and about 50 million will be replaced from data automation. So there's an opportunity there to come in with significant amount of machine analytics, their digital trend and so and so forth where the investments are. And similarly in banking financial services, their insurance, for example, which is -- to worldwide low [indiscernible] which means things are digitized under [indiscernible] automated place [indiscernible] and all these things we've sort of prepared to see that we will be well-prepared to invest service to industry requirements. And so and so forth in both retail and health care. So you can see that when we talked about 343, we had called out a few transformational debt. And I think the most transformational debt in terms of customer experience, in terms of platforms, in terms of the ability for the core network [indiscernible], is starting to play in all aspects of the [indiscernible] of the verticals in Enterprise has started to [indiscernible].
The next question is from the line of Vibhor Singhal from PhillipCapital.
Most of my questions have been answered. I just wanted to get a bit of feedback on the HCI acquisition. How is that panning out? I think last couple of quarters we've seen some ramp down in that. So are we close to bottom on that or there's still some pain left in that?
So health care vertical has grown for us, and of course, HCI is a big part of the vertical. So it's also done well this quarter. But as we said before, I think the ramp down on those deals were more of a life cycle nature and as new deals came in this quarter, we have seen the growth come back.
And you believe that would be sustainable until, of course -- barring the cyclicality of the business, the ramp up for that we saw in this quarter should be sustainable?
So I think yes. I think it seems -- so I think so -- that's what -- I think the question I would probably answer it differently, right? So fundamentally, there's nothing wrong with the business, right? So we actually saw a huge amount of ramp up. So I think there is going to be a -- there was some volatility because some of the projects ramp down and it'll come back up and that's what we had said and we maintain that, that from an overall thesis and from an overall synergy perspective, we strongly believe over a period of time, it'll do well.
Sure. Just my last question, Manoj, if you could basically, what I'm -- I know we would plan the wage hike as you mentioned in June quarter, so there's still some time left for that. But given that our attrition has been in the high -- I mean, more than 20%, 21% in this quarter. Do you believe that this time around, we might have to do with a bit of more of a higher wage hike on the higher side, given that we've had kind of a stagnant period for the last 2 to 3 years?
So I think I'll have to defer answering that because we are doing a full deep dive into that and then as we mentioned, probably the decision will be more in -- later in a few months in terms of what we need to do exactly. So I'll just hold off on answering that.
Okay. If I can ask that in a different manner, on terms of 21% attrition, does that worry you? And if that's yes, then apart from, let's say, doing that deep dive for the salary or wage hike, are we contemplating some other measures?
So I think from -- if I look at our historical attrition rate, right? We have hovered between 17% and 21%, right? So 21% is obviously, I would say, a zone which is at the high end of the range. So clearly, I think, and as Harsh mentioned some time back, the first cut analysis, of course, the attrition on certain type of people is much lower. And as with anything else and in something which is the upper part of the band, it is definitely a cause for concern. And from a talent perspective, would I ever say that talent availability is easy and it is -- we can easily manage? It's always been a challenge, it'll continue to be. So having said that, it's at the top end of our range and we will have to do the proper analysis and then tick the columns on what we need to do going forward to bring that down.
And just to add, Manoj. Just to add. This is Harsh. Is basically, what's important was that it's been obviously at the higher end, so we are doing a deep dive. But it's important to also note that it's heartening for us that our top performers have been on the lower end on the attrition. And that is now an important data point for us to also note down.
The next question is from the line of Srini Rao from Deutsche Bank.
I have two questions. One on -- does the issue of Huawei ban, does it have any impact you're seeing on potential 5G deployments? So that's my first question to Manoj. The second is, Manish -- second, your DSO obviously, historically, also has been higher than your peers. A, is it, on account of the different business mix or your DSO is comparable to your peers in verticals like BFS. So any feedback on that would be helpful.
So let me handle the DSO question first and then hand it over to Manish. You're right, I think the vertical mix and the geography mix plays a role in the DSO. So if I look at the Communication vertical, on an average -- can people on the call not put us on hold? So I think on DSO, I think clearly, the Communication vertical is one vertical where the credit periods are longer than some of the others. So short answer is yes. But if I look at like-to-like on some of the other verticals, I think the DSOs are more comparable. Having said that, can we improve? I'm sure, there is a fair possibility of improvement, and that's what we're working on. This quarter, we have improved it by 4 or 5 days, and hopefully, with all our efforts, we'll try to bring it down a bit more going forward. Manish, you want to pick up the question on Huawei and 5G and what could be the potential impact?
Yes, absolutely. I think the industry players and their relative positioning with different markets, different customers, is always in that state of evolution. It is now complicated by, of course, or rather made interesting by the geopolitical scenarios as well. But that said, from our vantage point, we have always taken pride that we are a technology-agnostic company, product-agnostic integration and platform company. And we partner with almost all the major technology providers in the network business. With, of course, in some areas, we have taken our own investment approach so that we can have a seat at the table as well, right upfront as the technology roadmaps are happening. So yes, it is an interesting time and it impacts some markets than the others, particularly, the market that are likely to join and adopt the 5G rollouts earlier. But one market where it probably will not have an impact either ways is going to be U.S. Because in U.S., we have not had much of a presence of some of these companies. And U.S. is likely clearly to be the first one to adopt 5G with the trials going on as we speak at this time. So I think the vendor base and the industry players -- that situation is evolving, not just between this top 5 or 6 traditional OEMs, but also the disruptors that are coming through the day, right? For example in Japan, with Rakuten, the entire RAN is not built on any of the 5 major OEMs -- established OEMs, but a completely new software-based RAN company like Altiostar. So I think it's an interesting scenario. I would request you to join us and observe this very closely as we see this evolving, and we will definitely have a good seat at the table as this develops.
The next question is from the line of Sumeet Jain from Goldman Sachs.
Firstly, I wanted to understand around the BPO space, as you mentioned that you are using a lot of RPA tools and automation in your latest BPO deals. So generally, we are seeing that leads to higher revenue per employee over the several quarters. But if I look at your revenues in the BPO space and the BPO professionals, what you provide, your revenue per employee in that space has largely been in the range of around $9,000 to $10,000 per employee. So can you comment like, is there a significant room for improvement out there? Or it's already at the maximum efficiency level?
Ritesh, you want to take that?
Yes, yes. It's a great question. I think some of it is a function of the business mix that we have. So we do have some percentage of our business that comes from the markets such as India, as an example, where the typical price realization per employee tends to be on the lower side, very little to what you get in markets outside of India. And to the extent that you end up having that, that does have a bearing in terms of the overall revenue per employee realization itself. Now that being said, one of the things that is very conscious in the way we are also executing several of these deals is to bake in committed transformation benefit on account of technology, such as automation, point solutions, platforms, et cetera, which are baked into the overall proposition going to clients itself. So what it does help is, even if the revenue realization at a point in time ends up being lower, your EBITDA ends up being accretive as a consequence of that. So I think there are a couple of factors that are playing out simultaneously at this point in time. That said, I do think that over a period in time as our business mix shifts towards getting more and more revenue as well in other markets and also more expansive use of technologies as well, I do think that the revenue realization per employee will also continue to move in the -- move upwards.
So maybe can one assume that within the BPO space, your offshoring competent is a bit higher? And probably because of that, the revenue per employee is lower, but your profitability is higher?
That will be correct at this point in time.
Got it. And secondly, Manoj, wanted to understand from you. You said that subsidiary portfolio level improvement is still one of the lever for you margin improvement, so can you highlight to what profitability levels have your key subsidiaries achieved? Particularly LCC, which had losses in FY '18?
So Sumeet, I don't want to go into each subsidiary level, right? So I think if I'll go back to something I said some time back, that if I look at that entire bucket, it was probably at around mid-single-digit level and we wanted to get it to double-digit. I think we're getting close to that level and then the next move would be that how do we move closer to the company level close as possible, considering of course location and type of service constraint. So that -- so I think we have probably covered, I would say, 50% of the ground there and I think 50% would be left. That is just the qualitative assessment, if it helps.
Right. And any tailwinds you are seeing for LCC, particularly given the initial rollout of 5G in U.S.?
Again, I'll request Manish to answer the question in terms of network services, including LCC, and how the rollout and the network rollout market is evolving.
Absolutely. No, we have -- no, no, I think the simple answer is yes. We are starting to get engaged in several conversations. In fact, we are in the advanced stages of a smaller deal, but it will be a strategic deal because it's in that what is called the fixed wireless back-foot area, which in many ways is going to be the cornerstone and foundation of a lot of 5G rollouts. However, we are also being selective about where we play, who do we work with, what kind of terms do we pick up. But the short answer to your question is that there is attraction in that space.
The next question is from the line of Ashwin Mehta from Nomura.
Just one question in terms of the BPO. Our segmental margins in BPO are better than our IT services margins, which is not the case generally. So just wanted to understand, especially in the backdrop that your headcount addition is higher than your revenue growth, what is the nature of work? Or is there a particular skew in terms of vertical which is helping you make margins better than your IT services margins here?
Ritesh, let me pick that up first. Just give some context and then I'll hand it to you. So I think if you look at the classification within IT, a lot of our subsidiary companies and so on and so forth come in. So I think if I really look at it from that perspective, that is one of the reasons. But having said that, the reason for our BPO margins and how we have introduced automation, RPA and what other tools and to drive margins. I'll leave Ritesh to answer that.
Yes, thanks, Manoj. So I think -- Ashwin, you were going down the path of some of the value levers that we are aggressively looking at towards driving industry-leading profitability. Automation certainly is one part of it. But we are also constantly looking at opportunities in every deal to try and drive the transformations, so as to do the right thing for our customers. And what that means is that where there are opportunities to cannibalize potentially our own business in the hope of getting more volume and taking shares from our competitors, that hypothesis for us has been playing out extremely well in the marketplace. And particularly in an environment where there are technology shifts, like what we are witnessing right now in the sector, we do find that there are a lot of pure-play companies who may not be going aggressively on leveraging the technology and maybe on defense. And from our standpoint, our strategy of being on offense out there and introducing this proactively and doing the right thing for our customers is certainly resonating with the -- with our client base. And that in turn is driving incremental volume growth as well, which in turn, therefore, improves profitability as well. That said, I think the second part of your question was that, which verticals if any, are we seeing the growth. I think what you'd find is that the growth is coming broad-based. We're seeing certainly in some of the verticals that the TECHM corporate-level like field, communications, media and entertainment or retail CPG or banking financial services and manufacturing certainly continue to be big drivers. But at the same time, we've also seen significant success with some of the digitally born companies as well. And all of that has also been helping us in terms of significant expansion, which in turn also creates some operating leverage, which in turn also improves profitability also.
Okay, fair enough. And just one follow-up for Manoj, to one of the questions that was asked. Your stand-alone EBIT margins have touched closed to almost 18.8% levels. So would you say the incremental improvements on margins will largely be coming through the subsidiary profitability improvement? Or you think there's more scope of improving the stand-alone margins also?
I think I answered the margin levers questions, and I spoke about some of those. So instead of trying to look at it as stand-alone, consolidated subsidiary portfolio, I think there are those 2 or 3 levers which I spoke about at the beginning of the call, I think we leave it at that. Because these are just structures which are legal structure. But I think our delivery models are more integrated today than ever before. So I wouldn't like to look at it as consolidated, was a stand-alone, was a subsidiary, et cetera.
We will take the last question from the line of Nitin Padmanabhan from Investec.
Two questions actually. The first one is, Manoj, if I just look at same time last year, this time around, our deal wins, I presume would be at least 50% higher than last year if I look at this quarter Q3 and Q2 put together. And in that context, if I look at our utilization rates and the subcon that has come down with the higher volume that we anticipate, do you think that there will be any execution issues or do you think that's taken care off?
So thanks, Nitin. I think in our estimation and our planning, we don't see foresee any execution [ issues ] coming through, and of course, the search for talent and getting the right capabilities is always going to be a challenge. But I don't think there's any specific challenge which we foresee as we think about executing on these deal wins, right?
Sure. And just one more if I may. Manish, do you think going into this calendar, do you think opportunities around M&A-related integrations will pan out? And how are we placed with that?
Yes, yes. I think I expect M&A-related integration activities will pan out, at least in 1 or 2 major ones that have happened and are also in the work at this point. And the type of work is going to be very synergic with what we have done in the past, are going to be around migration, integration, business process, rationalization. And in some cases, now that we are doing networks, also in terms of -- from farming of network assets and providing an inventory management support and so on, so forth. So yes, there will be some activity. I, of course, will not be able to quantify or even give you a broad order of magnitude at this point because some of these deals are also embedded as part of the larger transformation of lifting their customer brand.
That was the last question. I now hand the conference over to the management for their closing comments.
Thank you, everyone, for joining the call. And I know that some of you might not have got a chance to ask a question. So please do reach out to us on phone or by e-mail, and we'll try to get any unanswered queries answered. So thank you again for joining the call, and good night.
Thank you. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.