Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Tech Mahindra Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

[Chander Prakash Gurnani, MD, CEO & Director]

Thank you. Good evening, good morning, and welcome to Tech Mahindra quarter 3 '21 results. Thank you all for joining us today on a Friday evening in India. Some of us had met a few months ago. And during the Investor Day, me and my management team had presented to you, the Tech Mahindra's strategy and how it is branded as NXT.NOW. We had also discussed with you the extraordinary investments your company is making in cloud, AI, Cybersecurity and in Data and Analytics. The results are here where we are seeing a lot more revenue coming in from accelerated digitization of the market place and customer interaction, increased migration of assets to the cloud and operations now being run not only for work from home, but it has become work from anywhere. We believe many of these shifts will become part of the new normal, and we, as a company, have evolved our business model, where we have looked at human-centered experiences for the customers. We have looked at how customers will engage with our customers and how we can integrate our portfolio and offerings and be able to synergize with our customers and the customers' customers. Last 10 months, we set up 4 offices directly working with me. The transformation office led by Simmi Dhamija with a focus mainly on delivery and operations transformation, higher growth office, which is a growth transform looking at new markets, looking at revitalizing the alliances, large new deals, and more importantly, looking at new capabilities and service offerings. The third office looking at office transformation, where we are looking at company-wide: A, in streamlining offices and obviously, all the 4 teams work together with each other. So the office transformation has seriously looked at, again, the new normal, the command and control centers that are AI enabled too, which are required to work in an environment where all our employees can work from anywhere. The fourth office is obviously, on the people side. On the people side, we do believe that there is a complete reboot of not only their skills, but also to take into account that many of our associates may choose to work from either the home or the beach, but the reality is the beach is probably away till July or August. But right now, they're working from home, and they will have some unique challenges. So the cultural transformation, people transformation, business transformation or the growth office and the operative metric transformation all are working together. But I do want to compliment the teams for delivering what I call a integrated view, 360-degree view of the way we are engaging with our clients, our employees and more importantly, building the future together. The results are here. The future I think is a lot better. The results on one end is $1,309 million up by 2.8% in constant currency. We have seen an all-round growth and particularly Europe and comms group, network services group and manufacturing has been the flag bearers for this quarter. Delivery and operational excellence has resulted in what I think 19.6% EBITDA which is a 24-quarter high for Tech Mahindra. Our cash flow generated a total $800 million of cash we generated this year. The quarter 3 cash flow is $226 million, and it is again showing very healthy time. On the deal pipeline, I think it is one of the best deal pipelines I have seen in Tech Mahindra, $455 million of net new deals, and it is only going to become better. So net new deals signing this quarter is good, but it will become better. Our 5G continues to scale up, in the previous call, Manish Vyas had explained to all of us that it is really 3 vectors, the 5G ecosystem, the 5G in enterprise and 5G network. I'm sure there will be more questions on this, but I'm pleased to announce that one of the deals that we signed this quarter is from network for the 5G rollout in one of the European customers. So overall, what I would call a 360-degree collaboration, a 360-degree communication, a 360-degree people's connectivity has resulted in a lot of, what I thought -- what I believe, is a stronger company for future. As a company, we are also very, very conscious on individual social responsibility. Our employees continue to lead and demonstrate how they work extra hours over the weekends and sometimes they really [indiscernible] that employees would really spend not only the time and money, but they also will pool in all their friends together to create a wave of social responsibility. Community services continues to be a very strong forte. And the third plank of sustainability initiative are environmental and social goals. I think, we are continuing to be the best-in-industry, top 100 in the whole world and almost top 10, 20 in most of the initiatives across India. We have featured in CDP A List 2020 for both climate change and water management. Your company has also emerged as a leader in Dow Jones Sustainability World Index for the sixth consecutive year. So while 2020, there is many reasons to say why it could have been a different year, but I can only say that Tech Mahindra's team has rallied together. They become more customer-centric, they become more digital than ever and more data-driven and more disciplined than ever. So we continue to believe that all the awards that we're winning in various forums on our people management and overall the way we have all rallied together to grow what we have called as a Repair phase. I think we are now confident that we will enter as of 1st April in the Rally field and these are the 3 challenges that we have described to you; #1 is Repair because, as I said, all of us are collaborating to deliver value to customers in this crisis.Number two, on the Rally field, I think renew our investments in R&D, in new products and platforms and new service offering is going to give us better results. And within the Rally field we are hoping that we will have a lot of growth and I want to particularly highlight that when I spoke to you after the Q1 performance many of us were little uncertain how BPS will rally during the Repair themselves during the period when the pandemic hit us because many governments did not give the permission. Many of our employees did not have a desk or a computer to work from. Many of our employees actually had to go through a social situation where their landlords would not even allow them to operate from their houses. And today, this year we are leading in terms of our growth because this growth in business, 11.4% growth on quarter, I do want compliment Ritesh for his leadership and overall, BPS team for leading the Repair phase of the company. And again, Europe has done spectacularly well, communications has done well, manufacturing and network services. Over to you, Manoj, if you would like to share some more segmental news.

[Manoj Bhat, Chief Financial Officer]

Thank you, C.P. Good evening, everyone. I think as you'd have seen the numbers, the third quarter revenue grew about 3.4% on a reported basis. There's a crop currency of about 0.6 or 60 bps in this. So constant currency is about 2.8%. As C.P. mentioned, I think it was quite well-rounded growth across multiple areas, including some which were slower than usual. For example, we had alluded to Europe and network services being a slower revival. We are seeing a strong sense of revival there in some of these service -- sorry, some of these areas. In terms of net new deal wins, I think we are at $455 million. And again, I'm clarifying, this is incremental. And this is almost back to our pre-COVID level. And I do believe that given our funnel and given where we are in terms of closure and conversion, I think there is going to be an acceleration in this as we go forward. Coming to the EBITDA, I think the EBITDA was up to 19.6%, which is a margin expansion of about 140 bps Q-o-Q. I think the large portion of the increase was in terms of levers like offshoring, utilization, et cetera, playing out, which was about 80 bps of impact. And the balance was coming from operating leverage because I think as the revenue growth came in, I think the costs were held steady, and that's something which we have achieved through a combination of several things, including some of the things C.P. mentioned around automation, NAD, the whole bucket around delivery excellence. I think as we look forward, clearly, and I had talked about this in terms of 14% to 15% EBIT margin for FY '22. Clearly, with these numbers, I think we are very, very confident of meeting the high point of PAT as we go forward. From our perspective, there is costs coming back in terms of salary, in terms of travel. But I think we feel that some of the measures, which we have started, including what I would like to think about as portfolio synergies, I think they will continue to play out very, very well in the coming quarters. In terms of some of the other areas, free cash flow, I think we had a standard quarter again. We converted about 127% of PAT into free cash flow. I think CapEx was low and DSO reduced by about 2 days. So I think from our perspective, this continued focus, and I think the support of our customers has helped us achieve a reduction in 3 quarters of almost 17 days in DSO, which I think is something which we hope to see if we can sustain as we go forward in terms of maintaining those DSO levels. I think the hedge book continues to be at about $2.16 billion in that same range. We follow a consistent hedge policy and that's served us very well over a long period of time. I know there might be a lot of questions. So I'll throw it open for questions. Back to you, please, operator.

[Operator]

[Operator Instructions]

[Chander Prakash Gurnani, MD, CEO & Director]

So ladies and gentleman I just want to quickly introduce you the -- besides CFO Manoj Bhat. I have our newly appointed head of our business finance who wrote the rating as B, and we use him to look after our portfolio where all the [ thousand ] accounts, contract administration and the business finance, Rohit Anand on the call. I also have the head of our process confirmation office Neeraj Jain who used to be the CFO of Comviva joining me. Other than that, we are very familiar faces, Ritesh Idnani, Jagdish Mitra, Harmeet Taneja who is [indiscernible] transformation office and Harsh who is our Global Head of HR, and we have Manish Vyas, I mean, whom you all know very intimately. So I do have my leadership team on the call. I'm not sure if Ravi has joined the call, Ravi is our President and Chief Operating Officer.

[L. Ravichandran, President & COO]

Yes, C.P., I'm here.

[Chander Prakash Gurnani, MD, CEO & Director]

And Vivek Agarwal our president for Corporate Development, very rare quarter where we have not made an announcement today. We only made an announcement a few weeks ago when we acquired that Hong-Kong based company. Over to you for the questions please and Manoj please direct the questions to the ones that you [ prefer ] answering.

[Operator]

The first question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, Director of Research]

Yes. Just wanted to understand, if you look at our utilization looks like all-time high. And on the employee side, even on the BPO and on the IT services, we are seeing a decline on a Q-on-Q basis. While the industry is indicating that supply side constrain may increase and the attrition may inch up and people are going beyond just-in-time recruitment by creating a slightly higher bench. So is this lower visibility for us in the coming quarter or we believe that utilization has a further room for upside and that may translate into some positive surprise in the margin? So just wanted to understand this as a whole.

[Manoj Bhat, Chief Financial Officer]

Sandeep, thanks. So I think the way to look at it is 2, 3 things. First, let me comment on the headcount decline. So if you look at the headcount decline in BPS, it was largely because the retail ramp kind of ended towards the end of December. So that's a point-to-point thing. So I don't think you should view it like that. Coming to the broader question, I think from our perspective, we are now going to be in -- operating in a more 87% is the all-time high utilization. I think we will see it come back to more manageable levels in terms of utilization. The way to look at it is that we will see headcount growth going forward. But obviously, there is also a counter of automation and some of the savings coming through. We -- our plan now is to -- our campus program, recruitment program has already started recruiting in this quarter. And over the next 2 quarters, we expect about 5,000 people to join. So I think on all fronts, we are adding capability and talent. So from my perspective, I think it is about running the operations in a very optimized manner. But as we go forward, I think you should see the utilization ease up from the 87%. As the -- from a second perspective, which you said about growth, I don't think growth is the issue here. I think we will see growth coming into -- going into Q4 and Q1. And as I mentioned before, I think if I look at funnel conversions, I do believe that Q4 will be better than Q3 in terms of conversions also. So I don't think it's a reflection on that. I think it's a question of a period of adjustment back to a different kind of utilization level, which will normalize over the next quarter or 2.

[Sandeep Shah, Director of Research]

Okay. And the second question is on communication. Some of your large peers in India have started talking about turning around of growth prospects in the telecom, be in terms of pipeline and be in terms of conversion of pipeline into deal wins. So do you believe because we being one of the largest vendors on the telecom, do you believe that the growth visibility is becoming much more stronger and it may start firming around sooner than later as of now?

[Manoj Bhat, Chief Financial Officer]

I'll request Manish, he is on the call, to answer that question. As you know, it was a very strong quarter for comms for us. But Manish, over to you.

[Manish Vyas]

Thank you, Manoj. Thank you, Sandeep. Yes, you're right, we are indeed looking at some strong deal wins. There were a couple of postponements only for an interim period, but we do expect -- the pipeline is, I think I've been saying it has been robust and continue to grow across the board, from network to digital to BPS. And we do anticipate some of these deals maturing in the next few weeks, few months, if not the next quarter, we should see some.

[Operator]

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

[Pankaj Kapoor, Research Analyst]

Two questions. Manoj, first one to you on the headcount. Any plans for the wage hike? And if you're looking at utilization going down in the coming quarters with the hiring coming in and with the potential wage hikes also planning, being planned, then what kind of outlook you have from a margin perspective? So that's the first question. And the second question to Manish, in terms of the 5G deals in that C.P. alluded to. Can you give some color on the size of that transaction? And do you have similar kind of deals in pipeline, are these 5G deals more smaller in nature because if I look at your CV of wins in telecom, that doesn't seem to be very exciting.

[Manoj Bhat, Chief Financial Officer]

Pankaj, let me pick that question first. I think in terms of salary hikes and variable pay, I think entering Q4, I think, we should start normalizing on both of them. Our plan is currently to give a standard hike over a period of a couple of quarters or more across the employee base. So to me, the way we are looking at it and as you know, our current EBITDA -- EBIT is about 15.7%, there might be some pulls and pressures in a quarter, but I do believe we have sufficient levers to cover some of these over a longer period of time. So I think and as I mentioned, those levers, I think they will be around portfolio companies, synergies, how to make work more effectively, how to drive further changes in delivery model, whether it is through offshoring or through automation. I think some of those levers will help us offset some of these pressures, maybe not fully, but at least partially. And then there is a thing which I alluded to in the beginning in terms of the operating leverage from growth coming back, and that should also help in terms of the overall margin recovery because some of our costs will not come back almost permanently is what I feel, but that's the way we are thinking through it. Definitely, there will be increase in some of these costs, which you mentioned. I'll hand the second question over to Manish on the 5G deal and color on that.

[Manish Vyas]

So, absolutely, Manoj. Pankaj, I'm going to probably share 3 good news with you today. I know you all have been asking these questions for a while. Number one, we have always said, and I think C.P., again, alluded to the point that when we look at 5G, not only do we look at the ecosystem, the enterprises and service provider networks. But within the service provider networks, we also look at 5G, not just from a network standpoint but also from the overall digital outlay that needs to be transformed, modernized for 5G. So that continues to remain a strategy. Point 1, it's not new, it is just a reiteration of thoughts on what our strategies have been and will continue to be. Regarding the deal, it is -- it's a relatively larger deal, it's a bit north of $50 million price in size. It's a turnkey responsibility that the service provider has given us to execute and realize this component of this large area, layer of their network on an end-to-end comprehensive responsibility basis. Number 2, as part of our overall network business, our 5G component continues to increase both in terms of funnel as well as in terms of the percentage of revenue as part of the overall network business. Because if you may recall, we have always said that we will continue to transform our network portfolio as we continue to grow. We will always look to pick our clients very carefully to increase the software component in the network and to value things which are probably dilutive from a margin standpoint. So that's -- I think we are at more than double-digit of our networks business, slightly more than the double-digit number in terms of our 5G component of our business. On the pipeline side, it is even more. And that, I think, is a bit of a trend for you. And the third thing I would like to share with you is that while -- we have seen a robust growth in the overall comms revenue this quarter, it is largely also powered by the network business. It's probably -- we don't break it down, but it's a pretty healthy and probably one of the best quarters we have had in the network business, largely powered by the work we do in overhead orchestration and the 5G-related projects. So I hope that gives you a little bit of color on how we are trending vis-à-vis 5G overall as a business.

[Chander Prakash Gurnani, MD, CEO & Director]

Manish, do you want to add or Jagdish you want to add your strategy and uptake for 5G in enterprise also.

[Manoj Bhat, Chief Financial Officer]

Jagdish, you want to take it?

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

Yes, sure. So this is Jagdish. So a couple of areas that we've started seeing significant growth driven as we start to focus on 5G for enterprise, as we said, there are 3 vectors. And this by no means are huge deals, but these are extremely encouraging ones that you have seen at least about 8 pilots we are doing today across process industries, across ports, across oil refinery, across retail and aerospace and defense. And this is a combination of Europe, Middle East and Africa and from North America. And these are pretty large brand names that we are working with, and there are about 2 of them are go-to-market engagements with telcos where we are taking our relationship with the telco out to enterprises on the 5G for enterprise with our application service portfolio. And as some of you might have followed on social media, we're running -- it's actually finished yesterday. And our largest -- one of the largest virtual events on 5G topic across the last 2 days. And it was very well attended and very well represented. So we feel bullish about the enterprise segment as well.

[Pankaj Kapoor, Research Analyst]

Manish, if I can just clarify from the pipeline perspective on these around 5G, are they of similar size like $50-odd million, the ones that you referred to?

[Manish Vyas]

No. No. You're right. I think there are both types of deals. There are, of course, still smaller-sized deals, which are built around looking to do very point solutions in 5G, that will continue for some more time. But yes, there are a few deals which are indeed in a very similar pattern that I described. And there are a couple of them, which are actually a little bigger that are not exactly about rolling out 5G, but they're about creating the platform so that the next phase of investments can happen over the next 3 to 5 years within that telco. So it's a mixed bag deal.

[Operator]

The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

Congrats on excellent execution. So I have a couple of questions, first on the -- a little on the strategic side. So we saw Europe doing extremely well. Large part of that you assigned to filling up of some of the gaps, which we have been making an effort to in last few quarters, you think the result is because of that or do you think it is more traction on the geographic front? And secondly, is there some gap, as we believe there are in the U.S. as well as which you are trying to fill now will show results in coming quarters? So that is first part of my question on the strategic side. And a second question will be more on the growth and margin both together. So we are now as one of the earlier participants asked the question, that we are seeing some kind of a green shoots from the communications side. And if you also see all the commentaries around 5G, it looks like the ecosystem is coming together very strongly. So if that is going to fire and that has not fired for quite sometime, the comms have been weak for us for quiet sometime, and if that starts firing, obviously, Manoj, does it provide you a much bigger leverage to have a flexibility on the margin front? The reason I'm asking this question is that we have probably started running very, very optimum utilization or optimum capacity utilization right now. And I hear your point that you have started hiring and all, but that may take some time before it comes and adds to the workforce. So what is your sense on that front? Will it [hit] our execution in the near term or you think the -- our subcontractor costs will be elevated for that time until we fill that gap?

[Manoj Bhat, Chief Financial Officer]

So Sandip, the point is that, as I mentioned earlier, I think as growth comes back, I think, as I said, a quarter or 2 of adjustment might be there because we are coming off a model of extremely high utilization. So I think that's something which is going to happen over the next 2 quarters, and it will normalize back to probably the more usual levels of 84, 85. That's the zone we're in. The second thing, I mean, since you mentioned subcontractors, what's also happened is if you see the subcontract costs have also gone down. So they might go up and down here and there because we look at it, both of them, as fungible together. So from a question -- did I answer the question? Because you said something about the strategic aspect also. Do you want me to clarify further and ask some of my colleagues to add in also?

[Sandip Kumar Agarwal, Vice President]

No. I'm done on the utilization and the recruitment side, which you already answered, but I have one question on the strategy side, which I was expecting a answer on the filling up of some position. Basically the Europe growth, it is more to do with filling up of the gaps, which we have been doing for the last 3 quarters or do you think it is more of a geographic phenomenon...

[Manoj Bhat, Chief Financial Officer]

No. So it's...

[Chander Prakash Gurnani, MD, CEO & Director]

Manoj, let me take this. So Sandip, 2 or 3 ways to look at it. As I told you in my opening commentary is I have an extraordinary focus on [indiscernible], which is really cloud, data economy, not just data management which includes data monetization, cybersecurity and also on AI. So that is one whether you call it a horizontal because ultimately, it all folds into every vertical. The second is from a geographic focus, I mean, Europe had a few bad quarters, and they have now shown recovery. And I do believe that the company is, as a strategy, will continue to look for areas where we need to fill extra focus or an extra talent addition. So for example, while aerospace and automotive is right now not doing too well, but I actually want to be prepared, and I want to actually augment my capacity to create what I call the EV market. Now the reason I'm bringing this up is because we will get into -- we have already invested a lot in creating some vertical for EV. And that, I think, will be the growth market for us. So continuously, we will be finding niches, and we'll continuously invest. For example, Manish Vyas is now investing a lot in the capabilities to build the media and entertainment business. It's a small business for us today, but the investments are obviously disproportionate to the size of the business. I can go on, on practically every vertical or in certain markets. I mean, we are going to double up our investments. So I think it is a continuous process, Sandip. And on the strategy side, I promise you, we look at which areas to diverse and which areas to invest.

[Sandip Kumar Agarwal, Vice President]

Okay. C.P. thanks for that clarification. And also, if Manish can answer the comms part of the question, it will be great.

[Manish Vyas]

Sandip, like I said earlier, I think as far as the strategy as well as the growth patterns in the comms vertical is concerned it is going to continue to evolve around the 4 or 5 things that we have seen increased traction in. So for example, we are very clear that the digitization of the telco will -- is a huge priority by the industry. There, of course, are -- I mean, this is not an industry that is seeing the same level of growth as an industry as some of the other industries are at this point. And then there is a very clear pattern around because of how the traffic has shifted and what their product and services are. But that said, because of 5G, because of the opportunities around a new set of wireless and the new set of industrial use cases, there is no alternative but the industry will surely but gradually continue to digitize and modernize and the traction we are seeing right now are around what we call as the digital telco. I mean, we spend enough time on -- enough air time on discussing 5G, I don't think I need to elaborate on that. The third aspect, of course, is the whole concept of transformation of their customer experience. And as you know, we have probably one of the best portfolio in that space, starting from BPS all the way to the content, commerce and creative with what we have added in BORN and in between the whole transformation that this company has done for several years around CRM and the customer subscriber management system. So that's the third piece of our growth. I think the fourth and the fifth which are really becoming very exciting, these are still early days for the industry. This industry has not been the first to adopt are things like cloud. But as you know, we are probably one of the largest in this industry with some engagement that propel us with the capabilities that we have. So broadly speaking, we have our best well defined. We've also defined what other things which we will not do. And I think over the next few -- the next one year, you'll probably see manifestation of each of these initiatives translating into the transactions that we will do. I'm hoping starting next quarter onwards, we'll start giving you a little bit more commentary and color around it.

[Operator]

The next question is from the line of Mukul Garg from Motilal Oswal.

[Mukul Garg, Research Analyst]

I had 2 questions for Ritesh and Manoj. Ritesh, if you look at the performance of BPS, that clearly has been outstanding over the last 2 quarters. How should we expect this business perform going forward? Because I believe Manoj mentioned in his initial comments that there was a ramp-up of our retail business, which ended in December. So should we expect BPS to stabilize around these levels in the near-term before scaling up a little bit later in FY '22 or do you have enough momentum going on that the growth in BPS will continue to remain quite robust? Also, if you can just comment a bit on the strong profitability you have been generating in the BPS business this quarter, it was around 24%, which clearly is quite high. Manoj, on the wage hike side, just want to clarify, you mentioned that the wage hike cycle will be spread over a few quarters. So should we consider that this will not have a major impact in Q4, given that this will be a spread event and hence, things will be more stable?

[Manoj Bhat, Chief Financial Officer]

Ritesh, you want to go first?

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

Yes. Thanks for your question. Let me just respond to the points that you raised. BPS had a very strong quarter. We grew 11.4% quarter-on-quarter as C.P. alluded to right at the beginning and close to 20% quarter-on-quarter on the EBITDA side to almost a 24% EBITDA business, which is fairly high to the peak that you see in the business. We also crossed a very significant milestone in this quarter where we doubled our quarterly revenue in 15 quarters. To the question you posed in terms of the robustness of the business. So seasonally, Q3 tends to be strong for us because of the retail spike that we end up getting, but we also see some opportunities in Q4. We are sitting at our best of our pipeline as a business. And at the same time, we also see an opportunity to convert some of the deals that are imminent to give us a tailwind going into FY '22 as well. So overall, we feel extremely positive in terms of the outlook of the business going into FY '22. And we think that there is an opportunity to continue to take market share away on the back of the value proposition that we've been seeing consistently now for the last several quarters, cannibalize our existing business through hyper automation driven by AI analytics and platforms and number 2, deliver to outcomes. We think the post pandemic world allows us to continue to consolidate on that proposition and deliver superior experiences to our customers. So we feel very, very good with that. The second question that you had was related to the profitability side. And while I think -- obviously, we get a little bit of a tailwind there with the fact that a substantial part of the workforce is working from anywhere. And Manoj talked a little bit about salaries and things like that and travel that which are all contributing factors. We do believe that there is an opportunity out there as we continue to transform our customers' operations to get some benefits there in terms of how we run our business itself. So we think that those opportunities continue to exist as we continue to transform our operations because that's the promise of the business as well. And that should allow us to operate in a range from a profitability standpoint, while continuing to make investments for the future. Manoj, over to you.

[Manoj Bhat, Chief Financial Officer]

So Mukul, I don't want to get into what happens in next quarter and so on and so forth because, but I think what I mentioned was also that there will be pulls and pressures in terms of some of these costs coming back. But I do believe we have sufficient levers to try to mitigate some more out of it. So I'll just leave it at that rather than get into specifics of salary hike, which quarter, what impact.

[Mukul Garg, Research Analyst]

Fair enough. Manoj, can I just follow-up on that because this quarter, clearly, you guys have delivered a very, very commendable margins. Should we expect to see probably more than normal impact on margins in Q4, given that you are heading into not just 1 or 2, but quite a few -- opposite direction where you will have employee additions, which will be coming in, you will have utilization which will be moderating. You will have attrition, which probably will be spiking a bit from current levels, which are multiyear high. And then at the same time, you are talking about variable pay and wage hike. So is that something which will materially hit Q4 or you are reasonably confident that there is enough operational efficiency out there, which you can tap into?

[Manoj Bhat, Chief Financial Officer]

So I think from my perspective, if I look at it, that we definitely will sustain margins which is what I feel, if you are looking at just one quarter kind of view. And second quarter, Q1, obviously, there are some revenue, we have the seasonality coming in, Comviva, et cetera, that's a different story. But if your question is restricted, I think there's a large amount of confidence that we will sustain despite some of the pulls and pressures you talked about.

[Operator]

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

[Rishit Parikh, Associate]

Just 2 questions from my side. First, on the pipeline, while some of the players have seen better participation in the larger transformation deals, right? And it's been a while that we've announced some of the larger ones. So does the pipeline have some of these larger deals or it's largely in the mid-size that we are sort of focused on? That's one. And second, just on the transformation offices. How should we think about these offices? What are the key focus area, any KPIs that you could sort of share that we're looking -- we are sort of looking to execute over the next, let's say, 3 to 4 quarters?

[Chander Prakash Gurnani, MD, CEO & Director]

So let me take, Rishit, transformation office card. I mean, as the main phase, all 4 of them are program offices, where they are providing data analytics and tools, which allows my line managers to take decisions. Some of them have a direct central impact, for example, a process transformation office. Process transformation office is clearly looking at process improvement and being able to come up with models which are more predictive and more analytical. And it is always a basic processes that you tend to take for granted. One of the processes my team is working on which is Neeraj and his team are working on is forecasting to fulfillment. Now it's not a stand-alone process. They will have to work with Simmi's team on operating metrics. They will have to work with the sales operations teams. They will have to work with what is called our...

[Operator]

Hello, sir. Can you hear us?

[Chander Prakash Gurnani, MD, CEO & Director]

Any duplication of processes. Similarly...

[Operator]

Sir, sorry to interrupt you. We lost you in between.

[Chander Prakash Gurnani, MD, CEO & Director]

Rishit, can you hear me?

[Rishit Parikh, Associate]

Yes. Yes. You are audible now.

[Chander Prakash Gurnani, MD, CEO & Director]

Yes. So I just explained the process transformation office. Similarly, operations, future of delivery, which is what Simmi looks at it's clearly the main phase. It is all the 25 things which are on the operating metrics. It could be revenue per account, it could be revenue per employee, it could be a yield from a particular office and she has got about a team of about total 40 data scientists, which works with her and which give feedback to the IBUs which is our business units on how they can improve their performance. No business transformation happens without the people transformation, and that is where the team on the people transformation is continuously looking at: A, the culture; B, is the way we all are able to communicate and be able to look at our execution and collaboration. So that is what the people transformation office is looking at. Growth office, I don't have to say, but they have really 2 big vectors. One is on customer and account relationship expansion and #2 is mainly around the large deal team. So those are the 4 offices, but they are enabling offices. They enable the teams on the ground.

[Rishit Parikh, Associate]

Perfect. And then just on the large deals, how is the pipeline looking broadly?

[Chander Prakash Gurnani, MD, CEO & Director]

Manoj, you're taking this?

[Manoj Bhat, Chief Financial Officer]

No. Jagdish, if you can comment on the pipeline and how we are seeing ourselves positioned on this?

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

Sure. Sure. So on the overall enterprise pipeline, I think Ritesh also talked about BPS cycle. I think we have one of our best pipelines in enterprise over the last 6 quarters. And large deal itself, also the pipeline is amongst the best. And our definition of large deals, as you know, is $50 million deals upwards. And that deal discussion wise, we are approximately about $4.5 billion upwards of pipeline on the enterprise side. So bullish about the pipeline development, bullish about the large deal improvement as C.P. talked about, that's one of our key vectors as we start to look at transformation.

[Operator]

The next question is from the line of Sudheer from ICICI Securities.

[Sudheer Guntupalli, Research Analyst]

C.P., my first question is related to your earlier remarks...

[Operator]

May I request you to speak a little louder, please?

[Sudheer Guntupalli, Research Analyst]

Yes. Is this better?

[Operator]

Yes, sir.

[Sudheer Guntupalli, Research Analyst]

Yes. C.P., my first question is related to your earlier remarks about accelerated digitalization, driving strong growth for us. But if you look at your segmental growth rates, right, most of the segments which reported long growth, be it communications, manufacturing or Europe, essentially these are the segments which have gone through a sharp revenue decline in June, followed by subdued trends in September. So it is the same rebound that most of the economies or sectors, even outside technology are also reporting, aided by, let's say, mathematically favorable base. So what gives us the confidence that it's actually being driven by a secular trend of accelerated digitalization rather than a mere base effect?

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

Manoj, you want to take that?

[Manoj Bhat, Chief Financial Officer]

Yes, I think C.P. is probably unreachable. So I think 2 or 3 points here, right, which I wanted to clarify. So one is what went out and what is coming in are 2 different trends. It's not the secular trend you're talking about, right? So when we see spend coming back, it is coming back in the form of digital and something in the form of innovation, right? So that's the first point. The second point, I think if you really see, I think, across sectors and while BRS and manufacturing I did highlight when I spoke that it is also something we had anticipated will come back, that's happening. Similarly, as I -- and this is true for across sectors, what we are seeing is there are 2 trends playing out. And let me clarify those 2 trends. So one is that there is going to be a digital transformation, which is one layer of spend. But the other layer of spend optimization is the larger outsourcing kind of deals, where people are clubbing transformation as well as run function into one. So lift, shift and transform, if you want to call it that. But that's the other type of deal. And I think we are seeing both of those play out, so I don't think we can separate out digital transformation from almost any engagement today, including almost all of our deal pursuits. So I think there is an element of that. And that is probably why you saw that statement and you're quoting that. We truly believe that's how it is. Now this quarter, if I look at some of the areas where we are seeing growth, I think we even -- Ritesh alluded to it, even in BPS, we are looking at hyper automation and how do we tie those benefits in our existing processes. So I don't know whether we should take a narrow definition here. But if we take a broader definition, I think that trend stands true. And I think, as we have mentioned, I think there will be an acceleration in deal wins as we go forward is what we believe.

[Sudheer Guntupalli, Research Analyst]

Yes. And second thing is on the people front. So if you look at even before COVID over the previous 3, 4 years, to include, this is probably the second time that salary hikes may be getting kind of skipped in a single fiscal year. We have seen multiple rounds of, let's say, headcount rationalization, including even in the past couple of quarters. So from a sustainability and employee moral standpoint, how are the things? And how is employee morale essentially being taken care of in this backdrop?

[Manoj Bhat, Chief Financial Officer]

I'll request Harsh to add in but I think from our perspective, I think there are probably more at a generic level. I think you are right that there was a skipping of the salary hike cycle. I think -- but you must remember, we adopted a strategy, which was very different in terms of -- there were no variable pay cuts for below a certain level at all, right? And then it was graded across and I don't think we implemented any such thing. So I think we have adopted a slightly different stance, but I'll let Harsh articulate how we are thinking about employ motivation in these times and what are the measures we are taking there. Harsh, over to you.

[Harshvendra Soin, Global Chief People Officer]

Thank you for asking the question. So like Manoj said, even if we took the hit, I think it was more the leadership team that showed by example or led by example because we did not touch the majority of our employees in a hit who are at the bottom of the pyramid. Now as you know that there has been a lot of effort that the organization has put in for not only employees, their engagement and safety, whether it is -- and this was important because this was one of the key fears that most associates had. How to keep faith. And whether it's coming up with our Mhealthy platform, which is the foremost diagnostic tool, which we actually not only use for our associates but also our third-party employees. But also the whole 360-degree wellness program, including a huge amount of emphasis on our mental fitness or mental health, including a 24/7 counseling sessions which were available. I think the organization invested a lot to keep people engaged. So our Josh teams, our location counsel teams were very active. And as you see, I mean, the results show and our attrition is actually at the lowest in many quarters at about 12%. So obviously, despite the fact that people were going through a tough time, I think the organization responded to keep not only the employees engaged, employees happy but also reached out to families and extended families and took care of them. And I think that probably was one of the reasons why the associate -- our associates around the globe actually responded so well to take care of our customers and you can see the result shows that each one contributed to make this happen.

[Operator]

Thank you. That will be the last question for today. I will now hand the conference over to Mr. Manoj Bhat for closing comments.

[Manoj Bhat, Chief Financial Officer]

Thank you, everyone, for attending our call. I know that there might be some people whose questions were not answered. So if you can get in touch with the IR team, we'll make sure that we get some of your questions answered. Thank you all for joining once again. Thank you.

[Operator]

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