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Tech Mahindra Ltd
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Ladies and gentlemen, good day and welcome to the Tech Mahindra Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C. P. Gurnani, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.
Good morning, good evening, good afternoon, wherever you are. Thank you for joining the Q3 call. As most of you have seen the results, it's been a great quarter for growth, a steady quarter for EBITDA, I mean, a marginal de-acceleration, but overall a steady quarter for EBITDA and very happy with the results. The communication sector has grown 8.9%. Enterprise has also shown an all-around growth, almost all the geographies and all the verticals have shown growth; particularly satisfying is manufacturing, despite of the headwinds in aerospace, and automobile sector, has shown a good growth, particularly from the process industry. So overall, a great quarter. We also announced the acquisition of a VLSI and an embedded software company out of Bangalore. Again, my colleagues, Manoj and Agarwal will share a lot more details on that acquisition. We have also seen that the deal pipeline is very robust; second continuous quarter where we are announcing approximately $1.3 billion of deal wins, $900 million has come from a BFSI client, where we would be working together with the client on managed services and digital transformation. When I look back, I think the company is firing on all cylinders. Number one, investment in R&D, whether it's 5G, blockchain, AI or on cloud. The company continues to invest and continues to focus on not only technology but industrial solutions. Number two, collaboration with the academic world. We are expanding our footprint. We're setting up more centers of excellence. Number three, collaboration with what we call our TechMNxt program, which is a stronger alliance program, a stronger [Technical Difficulty]
Sorry, Mr. Gurnani. Your audio is breaking, sir.
I think -- sorry about that. I think C. P. was on the road. So what I'll do is I'll pick it up from here, and if C. P. can come back, I think we can have a few questions for him. So overall, I think C. P. was saying, I think it's been a good quarter in terms of all-around growth across geographies. I think some of the things around some of the verticals, where manufacturing has stabilized; BFSI, we are back into growth territory; I think we are seeing some of signs in terms of health care deals. I think we are continuing to win them. So I think a lot of positives from that side. Coming to some of the numbers, I think, clearly, if we look at the EBITDA margin, I think there has been a dip of about 30 bps on the operating margins. And if I look at the breakup of that, because of our efforts towards automation and AI, I think our utilization has climbed to an all-time high. It's about 84% today. It's an increase of 2%. That has contributed positively. Currency has helped us in terms of margins this quarter. I think the major headwinds were, of course, even last quarter, we were saying that the normalized level of SG&A was about 13.5% to 14%, so because we had a onetime benefit in the last quarter, and that's come about this quarter. The other thing is, of course, in terms of overall transition cost, that continues to be a factor in terms of the margins. And to me, I think, overall, that's slightly below where we thought it would be in terms of the quarter. I think as we look at -- going forward, I think the margin levers continue to remain, and I'll talk about that later. I think the other thing I wanted to highlight is in terms of our operating cash flows. I think it's been a very strong quarter of cash flows with about -- free cash flow being about 118% of PAT, which is, I think, possibly the highest we have ever had in terms of percentages. And the DSO for the quarter decreased by 2 days. Our cash and cash equivalents were about $1.16 billion as of the quarter end. And headcount marginally reduced on account of normal business operations; most of the reduction was in the BPS side. I think, hedging, we continue to follow the same policy and the hedge book is about $1.9 billion. And that's something which we have consistently done. So what I would now request is ask Vivek to spend a few minutes on the acquisition we did on Cerium and then throw the floor open for questions and discussions. And we have our entire management team to answer these questions. Vivek? Yes.
Thanks, Manoj. So I think what we've signed today is to acquire 70% of Cerium Systems. This is a Bangalore-based semiconductor and chip design firm. This is a continuation of our acquisition strategy of building capabilities or acquiring capabilities in white spaces. And this creates a new capability for the organization, as well as our belief and where the market is headed from a technology perspective. Silicon engineering is becoming very important across a number of verticals, when you start looking at use cases in automotive, consumer electronics, med devices, IoT. And this acquisition will help us strengthen our offerings to our clients in a number of verticals. And that is on top of the conventional semiconductor industry where we will be able to establish a footprint. We are buying 70% of the business upfront for $24.5 million, and then we would buy the balance, 30%, deferred over the next couple of years, linked to the performance of the business.
With that, we can throw the floor open for questions.
[Operator Instructions] The first question is from the line of Nitin Padmanabhan from Investec.
Congrats on a great quarter. Just wanted to check, considering that we have had very solid deal wins and the transitions are likely to progress, do you think that margins could remain subdued in the near- to medium-term before we see a pickup, or we continue to hold on to achieving the 12.5% to 13% for the year?
So Nitin, I think the deal wins -- the large deal wins which we signed in Q3, I think there will be some impact in Q4. But I don't see much of an impact beyond that. So there, you will have to adjust those numbers for that. But other than that, I think, because of the faster transition on the communications large deal, I think we will start seeing some of the cost reductions also starting coming through probably later part of Q4 and going into Q1. So it's a little bit of a balance, but clearly, I think there will be some additional cost in Q4, which will have a -- I don't think it will be a major impact, but it will have some impact on the numbers.
Sure. And second is considering that we've had 2 big quarters in terms of deal wins, do you think it'll sort of offset the seasonal weakness that we have seen in Q1 in the past?
So Nitin, I think we'll have to see because there are multiple factors. It's probably too early to comment. But yes, they will help in reducing some of that volatility in Q1 because the current quarter deals will ramp up during the course of Q4 and Q1. And that will help in terms of mitigating some of the volatility. In terms of the communication deal, I think, during this quarter, I think our transition has progressed much better than we expected. So I think that deal is almost at full potential in terms of the revenue. And of course, this is the first phase of the deal; the second phase of the deal and the third phase of the deal will evolve over a period of time. But that's -- so the immediate triggers in terms of that deal [ won't ] be there for Q1.
The next question is from the line of Sandeep Shah from CGS-CIMB.
Yes. And congrats on good deal wins and the good growth in this quarter as well. Just few things. In terms of Telecom, can you break down what is the deal win in this quarter?
So I think it's about $150 million or so, Sandeep.
Okay. Okay. And what is the outlook in terms of deal pipeline, especially in the communication? Do you believe the deals which we have won in AT&T are sporadic? Or more such larger deals are shaping up in the pipeline, and we continue to remain positive in terms of communication growth over medium to longer term?
So Sandeep, what I'll do is, first of all, I think large deals of this magnitude are going to be sporadic. So -- but instead of -- the other way to answer this question is probably, I'll request Manish to step in, give a view of where we stand in the communication business across multiple aspects, including funnel, deal wins, how does he see geography, where are telcos investing, and so on and so forth. So Manish?
Absolutely. Thank you, Manoj. Sandeep, for the question, I want to first echo what Manoj said that large deals are not -- large deals of that proportion and magnitude are not -- it's not a platform where you can do those deals every quarter. So they would be at best sporadic, but the overall question that you asked is even more important, that the pipeline and the funnel across the spectrum of our service offers and across the spectrum of our geography focus areas that we have decided to invest and remain invested in, that continues to remain healthy. I mean, suffice to say that we are busy across our digital footprint, our network, our BPS as well as our engineering footprint. And going forward as well, that will continue to remain a very strong operational focus for us to continue to attack all pillars, as we say, and in the geographies that we are focused on. The important element is that the deals are triggered by essentially the need for service providers to drive more efficiency than what they have and to continue to modernize, whether on the network side or on the system side, from a transformation standpoint. So the deal sizes vary depending on the size of the service provider, but the structure of the deal that we did in Q2 is -- Q2, Q3 -- is likely to continue to be there, the sizes may vary as we go along.
Manish, just a follow-up to that is, it looks like -- are we in the initial phase of these kind of deals where client telcos are looking to optimize and modernize the spend? So where in terms of the penetration level for these kind of deals are there? So you believe still it's few clients who have started and more to follow as a whole?
Yes, there's never a global pattern as far as saving money and modernizing is concerned, barring the fact that there will be 1 or 2 big trendy things. But overall, it's always about what is specific to that one customer. I wouldn't even say that it is a region-specific trend. So hence, the maturity of the deal funnel that we have is very mature to just about starting. It's a full range really.
Okay, okay, okay. And Manoj, just on the margin, even you believe that 12.5% as the lower end band of your targeted margin for FY '20, because of the deal transition costs, may not be now achievable?
So I mean, there's only 1 quarter left, so I don't want to give a specific number, but what I meant to say was, I think the question last time was 12.5% to 13%, will we hit that number? And I said there will be additional costs coming in, but obviously, I think, as you know, Q4 is a better quarter also for some of our businesses. So that's -- so I can't be precise about 12.5%, 12.4%, 12.6%, but that's something we'll have to see, Sandeep.
Okay, okay. And just related question. This quarter, if you look at the gross margin, despite the deal transition cost it has actually gone higher. So it's largely due to currency and the utilization, which more than offset the deal transition cost?
So I think in the construct of the deal, of course, that has helped, but also, I think, since we are able to hit certain milestones in terms of the transition, I think, that's also helped on the revenue side. So I think both of those impacts need to be taken when you look at that, yes.
The next question is from the line of Rishi Jhunjhunwala from IIFL.
Firstly, on the enterprise deal wins, so the 1 large deal that we have won in the Insurance segment. Just wanted to understand the nature of that in the sense that, I mean, clearly insurance is not a very big part of our overall portfolio, but this seems to be a landmark deal. And I'm assuming a large part of that, I mean, it would have been a fairly competitive bid comparing with -- it with some of the other peers as well. So what has gone into winning this deal? How is generally the pricing construct? Or is it something where we have promised savings over a period of time? How do we look at this large deal?
I'll request Vivek to answer that question because he is the architect of that deal. So Vivek, if you want to comment on.
So I think there were 2 or 3 different parts to that question, and I'm going to try and address as much as I can in terms of client-specific information. So firstly, in terms of nature of work, so this is largely a horizontal deal around infrastructure services. Clearly, there's nothing -- there are no hard boundaries. So there will be parts of domain, but the basic offering is around infrastructure services. There's a run component and then there is a transform component in terms of taking the organization on a digital journey. So all the standard offering capabilities around automation and AI are an integral part of what we will execute for the client. We will do a large-scale cloud migration, that's part of the transformation journey. Similarly on enterprise networks, I mean, that's been an area which we built capability over a period of time along with Manish from the -- coming from our heritage around telco networks. So there is a -- there's work around network transformation. And hence, while domain is important, our need to understand the customers' business is important. And we do understand, to that extent, we may not be very large in this subvertical, but our ability to execute on a number of the technology transformation initiatives is why I think -- stood us in good stead in terms of winning the deal. I think the next set of questions were more around the commercial -- commercial constructs. And I think, clearly, some of it is client-specific, so we won't go there. And Manoj has anyway guided on the overall margins, which we manage as a company. And in terms of controls and processes, how we do it on deals, we've adhered to a lot of those principles as we've gone about structuring the deal.
Okay. And secondly, Manoj, if you really look at this year, the subsidiary profitability on the EBITDA margin side has been fairly decent, but if we really look at the minority losses, those have swelled significantly when we compare it with last year as well. Just wanted to understand what is happening there in terms of whether are there significant one-off charges that have happened on the nonoperational side? Or what is the reason for minority losses to go substantially higher?
Are you talking at the consolidated level or the starting level?
Yes. Consolidated level.
So I'll have to get back to you, Sandeep. Offhand, I can't think of a big reason. But if during the call, it comes back, I will answer that question. Yes.
The next question is from the line of Mukul Garg from Haitong Securities.
Congrats on a good quarter. Manoj, just 2 related questions. First, on the deal wins, last 2 quarters have been really impressive. While Telecom capabilities is probably well known. But again, I think the total deal value compared to what you guys have won historically has gone up materially. So is there something which is -- which you guys are doing differently versus earlier, both on Enterprise and Telecom side, which is helping you win large deals? And should we expect this to continue? And second, basically, given that Q3 and potentially Q4 will benefit from them, are you looking at the respective vertical -- per segment growth a little bit differently than what you were expecting around the analyst meet time?
So let me pick the second question first, right. So I think the way to look at it is, of course, whatever we mentioned during the analyst meet in terms of enterprise and comps, I think some of these wins came with a very solid footing in terms of visibility, right? Now, of course, as visibility keeps improving, we will come back to you. But at this point, I don't think we're changing our view. And keep in mind, these are fairly early days of both these deals. If you look at it, it's actually been only 3.5 months or so; 4 months into transition on the first one and about probably 15 days to 1 month on the other one. So on that, we will reserve our comments in terms of whether we should look at -- thinking about that kind of reference point differently. But on the Enterprise side, I wanted to get in Jagdish in terms of what are the key initiatives which are driving funnel growth across verticals and across some of the competency areas, and I think Vivek did mention that how competency and strong capability demonstration is also leading to be a differentiator in some of the deals. So Jagdish, you want to comment?
Sure. Sure. Thanks Manoj. So I think a couple of things, we started taking a few steps about 2, 3 quarters back for the overall for the company and definitely for the Enterprise side of it, if you recollect, we said we're going to bring an initiative or driving through based on our value change and growth strategy to look at the change aspect of what each of our customers are looking, which is really digital transformation. And therefore, the role of the competency in modernizing the organization in change. So we've always reported good digital numbers and I think we were always talking about saying how do we use those digital numbers to lead the discussion. Now it's starting to have this competency and vertical play in defining what could transform these guys. So that's probably proactively setting up with the competencies that we talked about, whether it's cloud or different aspects of digital, enabling us to drive a better growth pipeline. And the other initiative is, we are leading with a little more business-driven initiative. We had started an initiative called 25x25 for our initiatives on business and that's starting to at least create a good momentum in terms of proactive conversations with our customers. So that, I would say, would be 1 of the -- 2 of the initiatives that are driving, I think, good pipeline. I hope that answers your question.
Yes. No, I think it helps a lot, but I also wanted to understand, and specifically in the context that given that historically, on the Enterprise side, specifically, you guys were meaningfully smaller than your peer group. So A, have you started kind of getting at the same perception level as the larger IT vendors in Enterprise side? And B, are you seeing a significantly more number of large deal wins, multi-hundred million dollars, coming out in the market, which you guys can compete in?
So a couple of things. So I guess, the journeys don't happen overnight, it started a while back. We did state very clearly that we're going to invest in creating and developing our Enterprise business, which was a conscious step knowing that we are sort of falling short of some of our larger peers in the industry, and we picked up a few areas to focus on. So our strength in manufacturing, digital transformation around BFSI, driving BPS growth into Enterprise segment, driving 25x25 initiative, as I just talked about. So yes, I would say that we are approaching these verticals from a completely digital transformation type play rather than trying to compete on the same grounds that our peers are. And it's starting to show results across the verticals. Some of the verticals -- so for example, even -- we'll talk about it later, but for example, our synergy in HLS is starting to play out very well. So the seeds that one sort of had put together 4 to 6 quarters back is starting to play out well now.
The next question is from the line of Sudheer Guntupalli from Motilal Oswal Financial Services.
Your growth in BFSI and retail seem to be very strong. This trend looks like a bit of divergence from the industry trends and concerns around the slowdown in these 2 verticals, so any qualitative color on this will be helpful. And how sustainable is this going into the quarters ahead?
So I think we have said this many times in the past, that from a BFSI perspective I think our growth approach is slightly different from some of the larger peers, who have, obviously, a different history and a different coverage. So I think our commentary and our behavior is probably not necessarily true across the sector. And that's something we have always maintained. So to me, I think, as we stand here today, I think it looks like that going into next year I think BFSI will be a growth vertical for us. And it is something which, I think if I look at the last few quarters, I think we had a bit of slowness, and I've spoken about this, that a lot of our business is transformation, and there will be transformation cycles and then there'll be sustenance cycles. And that's in line with that. So that's my view. And I won't mean it as a commentary on the broader BFSI segment, but it's a commentary on our BFSI segment.
Sure. And if I look at the growth across client buckets, there seems to be strong growth in the revenue from top 5 accounts. We understand this might be because of the ramp-up of the large telecom deal, but the clients below that, top 6 to 10 and below, there seems to be a sharp revenue decline, indicating growth was pretty much concentrated and driven by top 5 accounts. But if you look at the geography growth rates, on the other hand, it has been fairly broad based. So just trying to reconcile how the invoicing is done for these top accounts? Are these invoiced across geographies, including rest of the world?
So many of our clients would be multi geography, firstly, right? So secondly, I think we report top 20 for the quarter. So there might be some differences coming through because of that. Because you must remember, for example, some of our businesses are -- go up and down in terms of quarters. And specifically, I think some parts of our health care business, some parts of our mobility business. So I think it's probably a combination of that, but I don't detect a pattern otherwise, from what you're saying, right? So it's not a structural thing.
The next question is from the line of Abhishek S from Elara Capital.
Just -- the first is a clarification regarding the large insurance deal that was mentioned earlier. Now the -- it seems that the deal was predominantly APAC dominated. So would it have any different impact on the constant-currency business that we do?
I think we have clarified this deal. I don't want this to be like a discussion around that. But yes, it has components across multiple geographies, including APAC, and that's where I would like to leave it and in the U.S.
Okay. That's helpful. And secondly, would like to understand the capability of the acquisition that we announced today. From a per employee metric basis, the revenue profile seems to be substantially inferior to what we have. So could you just elaborate on to what capability is kind of getting integrated into the business?
Sorry, could you repeat that question? I lost you in between.
So from a revenue per employee metric basis, the acquisition revenue per employee is substantially inferior to the company average. So if you can just help us understand what capability buildup happened because of the acquisition, that would be helpful.
So -- you're calculating it, how, so that just we can follow the logic.
So from your filing, it seems the revenue for -- was around $115 million and the employee number is given along with the filing?
Hundred and...
It's INR 105 crores as the revenue?
Okay. And 850 employees, but 850 is current employees and INR 105 crores is almost a year back data, right?
Yes. So even if I apply the growth rate for the past 2 years has been like average 70%, that translates to $25,000 per year kind of a business. So I'm just trying -- curious to understand from a capability stand?
So I think 2 things. One, it's a largely offshore business. And it's in a growth phase. And so there will be -- that differential, what Manoj said, about revenue -- historical revenue numbers versus where the business is now and what we see as the growth prospects of the business. And I think from a capability perspective, and that is really our driver for the acquisition. So in some ways, the size of it is secondary. What I said right at the beginning, I mean, apart from the opportunity we see of -- in the semiconductor industry itself, it's a large addressable market, and we didn't have any historical capabilities in that space. That's one reason. And secondly, we see silicon engineering becoming a very important and integral part going forward as you start looking at autonomous driving, IoT, electronic devices. So this was -- med devices. This will help us across a number of verticals to be able to offer a more competitive offering for our clients.
The next question is from the line of Sandip Agarwal from Edelweiss.
So Manoj, I have 1 question on the margin front. Our margin journey has started, and we have done extremely well in the last few quarters. This quarter, probably we were not able to expand much. Can you give us some sense that given the huge amount of deals which are happening, is the margin trajectory is still on the northern side, where we can see significant improvement? Or you would say that it may take a little pause for the time being, number one. Number two, on the growth front, are you seeing a very big change on the Telecom side which is driving such huge growth, or is there something else?
So Sandip, if I look at margins, and I really don't want to concentrate on Q4 and talk more about next year, right? So we have said that we will improve margins, which still remains to be the case, right? So I don't think anything we have done in this quarter changes that. Number two, as I mentioned, probably Q4, we might have some additional costs because of the large deal. But going back into Q1, et cetera, I think some of the levers around margin improvement will start to kick in. Then the third thing we had said even last quarter was operationally, I think, we have a goal in mind in terms of the margins for FY '21. Now of course, every such large deal which comes in, of course, it becomes a bit more of a stretch, that much I think I have to say. But clearly, we'll have to find ways and means to get to margin improvement. But definitely, I think margin improvement will happen. Now the extent of margin improvement, I think that's something we'll have to look at. Yes. Hello?
Mr. Agarwal, does that answer your question?
Yes, there was a question on the large deals in the Telecom side also?
Sorry, what was the question? I think you had said, is there any fundamental change in the market which is causing this? Was that the question?
Yes.
And Manish, you want to pick that up? I think you've covered it in your first question.
Yes, I will.
I think you covered it in your first question -- first answer, but please.
Yes, I'll probably paraphrase that slightly differently, Sandip. But -- so the question is, are there any new trends? No, but the same trends continue. Broadly speaking, the need for the service providers to reshape their operations across IT network, back office, is going to be a continual journey and a trend because they have to be ready as their products and services evolve from beyond voice and data, Part 1. Part 2, I think the overall CapEx cycles are largely driven around both architectural change as well as the expansion that they will do on their network. And while that may be a nonuniform pattern, but that will continue to remain a pattern for a period of time. So our drivers for -- broadly speaking, across the world our deal funnel today, irrespective of which competency and pillar we are talking about, is indeed falling into these 2 big criteria on these or is chasing these 2 trends, if I may. I hope that answers your question, Sandip.
The next question is from the line of Rahul Jain from Dolat Capital.
Congratulations on a strong quarter and deal win. Firstly, in light of our improved deal win performance, can we say that we are set well to deliver higher than industry level growth or at par with larger peers in the next fiscal or FY '20?
I did answer the question a little while back, right? So I think with every passing quarter, I think our fundamental -- and what we have said is our ambition is to grow ahead of industry in Enterprise. And on the comps, we want to be steady in terms of the growth. And so that's something which is being made more concrete and more probable. And I also said that any comments on increased -- increasing that visibility is something which we will comment as and when the quarters progress.
Okay. And secondly, in terms of the acquisition, the growth in this business has been very significant, at least on the data that we have shared and considering the growth and valuation that we have paid, is it safe to assume that the current profitability in this business is quite low?
I don't -- I think it is running at a decent profitability. It's not very low. But again, I think -- to me, I think we are spending a fair bit of time on an acquisition which is essentially a capability acquisition, and in the overall context, I think. from a revenue accretion, it is not probably a very significant one, right? So I think in terms of multiples, it is in line with what we have paid for some of our other acquisitions.
And I think it's a timing issue of historical versus where the business is now is what I would say.
Right. And if I can squeeze one more. To the earlier comment about that the Telecom prospects are looking promising from a funnel perspective, but not necessarily from a specific trend perspective, how we see this as a unique or superior opportunity for us? Is it more about our historical strength in the vertical? Or is it a general statement, and it will all be a function of our win ratio going forward?
So your -- Rahul, if I'm getting your question right, you're saying what is going to be our right to win in the Telecom space?
So what I'm trying to say, if we just look at last couple of years' performance in this vertical to put together, I think our growth has been lower than our other peers. So -- and now since this funnel is, in general...
Don't put me in, I'm all right. I'm going off. Don't patch me.
Yes, sorry, go ahead, Rahul.
So as I was saying that the past growth has not been that significant, if we look at 3, 4 years as together. So what gives us confidence that this general optimism that we see in terms of funnel will materialize into a superior growth for us? Or it is just more of a relative versus what we did now and what we see into future?
Got it. Got it. Yes, absolutely. Yes, great question. See, I think the last 2 or 3 years, as you would recall, has also been a function of more than normal slowdown in some of our businesses, right? It also was a result of some of the voluntary retirement that we had done of an acquisition that we did 3, 4 years ago, where we took specific steps to rightsize our focus areas from a portfolio and from the market standpoint. The reason I say that is also to add that it is not that we have at any point in time stagnated our ability to win, our investments in our offerings, or more importantly our relationships with the market leaders in almost every major geographies of ours. We have continued to win market share with almost all the major service providers. That said, there indeed was a little slowdown in spend from some of the major ones that we do business with. The other little factor, of course, is I think we have said it before that the categorization of our Telecom business is pure-play telecom. It doesn't add a lot of the other sectors that some of our eminent peers do include as part of their business. So that's beside the point. That said, going forward, I think our -- we are well positioned based on a combination of 2 or 3 things. One, our access rights, our relationships with the leading service providers are better than ever before. We continue to be in discussions with them for either the run change or the growth opportunity. Two, the investments that we have made in recent times including having built some very specific ITs and some specific partnerships across BSS, OSS and the related areas where the CapEx cycle is likely to happen, I think it will also probably put us in good stead as we go along. And third, if anything, we continue to believe that we may have done lot of our optimization, it is maybe behind us, most of it. And hence it's about trying to take a march forward and continue to put one step forward every [ other ] quarter, but we've always maintained this is a journey. Telecom industry is not exactly at a point where their growth rates are highest across all industry sectors. So there will always be a little churn that will continue to happen. But our worldwide presence with almost every single major service provider, I think, is a good position to be in. I would any day stake that position than anybody else.
The next question is from the line of Vibhor Singhal from PhillipCapital.
Congrats on a great set of numbers. Sir -- Manoj, is it fair to assume that the AT&T deal contributed for the full quarter in this -- for the full period in this quarter?
Yes, that's a right assumption, Vibhor.
Sir, just 2 more questions from my side. One on the subcontracting cost, as we have seen, and you mentioned in your opening remarks also that probably we will discuss that in more detail. So as we have seen, the subcontracting cost rise in this quarter is around 16% of the revenues. So what is the kind of comfortable level of target that you're looking at? Or if not a target, or at least a number that you would be comfortable within, considering that we are getting these large deals, which would require some subcontracting as well. So what is the number that you believe -- as a company, you would be comfortable with it? And secondly, on the manufacturing business, in the analyst meet, we had mentioned that the auto business of the manufacturing vertical is probably facing some of the headwinds because of the weakness in the overall global auto segment. So does the commentary remain the same? Or have you seen any changes in the few weeks or period that has lapsed between the analyst meet and now?
So let me pick the first one first. So if I look at subcontracting cost, I think it's largely because of the deal transition. So I do expect that going into Q4 and Q1 it will start to come off to probably some of our historical levels, I think, was about anywhere between 12.5% to 14%. It's in fact something which we do expect will happen over a period of time. Having said that, I mean, I think, obviously, we have always thought of subcontracting as an integral part of our resourcing mix, and that's something which we continue to do. I think in terms of your second question on the auto segment, from the Analyst Day to now, I don't think there's any incremental difference. But I think if you look at our commentary, even prior to that, it has bottomed out, that's what we feel, and that's what's happened this quarter in terms of -- if you look at the manufacturing also. And that's kind of consistent with what we thought would happen.
Color on any kind of a deal postponement? Or maybe...
Mr. Singhal, request you please repeat your question please.
Am I audible now?
Yes, you are.
Yes. So my question was basically, I just wanted to check if from any of the clients perspective or overall, have you seen any kind of weakness or postponement of deal flows? Or do we expect the same because of it being a U.S. -- election year in the U.S. this year?
So I think "same" is probably a wrong word to use because we have had 2 record quarters. So -- but if the question is, are we seeing deal postponements? I don't think we are seeing any deal postponements. I think a lot of engagements, a lot of chats around what can we do together. And what -- a lot of pursuits are in place. So I think the answer is -- short answer is, no.
The next question is from the line of Sumeet Jain from Goldman Sachs.
So couple of questions. So firstly, wanted to understand, are you planning to increase your local hiring levels in U.S. just to ensure in future whenever we are winning such large deals, the subcontracting cost doesn't go up?
So Sumeet, most of these large deals, I think it is kind of now probably a combination of local plus global plus, I would say, subcontractors, right? I think it's a mix. And in some cases, there will be nonmanpower costs in some form of fashion, right? Because I think, as with most of these, I would say, mega deals, you would take end-to-end responsibility across multiple buckets. So having said that, from a localization perspective, I think we are seeing increased localization, and that's something which is an effort which we are putting in also. And I would request Harsh to talk a bit about some of our localization efforts.
Yes. And thanks, Manoj. I think you put it aptly that as part of our strategy we are doing localization across, so for example, from engineering to business schools, because as a strategy we believe that it gets us closer to the lay of the land. And also, we would like to hire people from the same country or region we are in. So nothing changes because of any deal, but as a part of our strategy, we are obviously putting efforts to make sure that that is on the rise.
Got it. And just one more question. I think, Manoj, you have mentioned in the past that portfolio companies' profitability, increasing that, is one of the key levers you will be focusing on. So can you highlight some of the key portfolio companies you are focusing on to improve profitability next year?
I think from a perspective of portfolio companies, I think there are 2 elements here, right? So 1 is, if we think about revenue synergies and how do we take the operating leverage of the business, right? So because I think a lot of these portfolio companies, I think we have a front-end investment already, and it's a question of how do we adequately lever it up by actually winning more. And I think that journey is well and truly started. And I think I would say -- overall, I would say the health care side has seen the most traction there, but we are pretty positive that it will kind of move to some of the other areas also. The second area is in terms of thinking about how do we leverage our combined synergy on the cost side, whether it is in terms of facilities, in terms of procurement and so on and so forth. So that's the second big initiative. This is also all across portfolio companies. To me, I think this is a margin lever from both perspectives. And I think that will play out in the coming year across all of our portfolio companies. I don't know whether you are looking for anything else, but that's broadly how we are approaching it today.
Ladies and gentlemen, due to time constraints that will be the last question for today. I now hand the conference over to Mr. Manoj Bhat for closing comments. Thank you, and over to you, sir.
Thank you all for joining the call. And as usual, if you have any questions, please do feel free to reach out to Kaustubh or me and we will be happy to answer any questions offline. And Sandeep, I owe you an answer on that one. I'll come back to you. Yes. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.