Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q3 FY '22 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 of Tech Mahindra. Thank you, and over to you, sir.

[Chander Prakash Gurnani, MD, CEO & Director]

Good evening, good morning. Welcome to Tech Mahindra Quarter 3 '22 results. Thank you for joining us today. I know we all have successfully navigated or are in the process of navigating the third wave. I wish you all a very happy new year and good health in the year -- FY '23, calendar year 2022.Your company has begun to accelerate its journey towards becoming more purpose-driven, people-centric and performance-driven organization. We had -- some of us have met in November. We spoke about your company, focusing on value creation for the customers, for the associates, for the community and for the shareholders. We remain committed. Even in this quarter, our results reflect our commitment to deliver sustainable, profitable growth. We remain committed to ESG. We remain committed, in the same breath, to the prudent capital allocation and creating, in general, a better company every day. We have taken a few bold [indiscernible]. One of the bold bets was BFSI being split into BFS and I. During the course of the day, we'll talk more about the recent acquisition and why insurance has been split as a separate vertical. But if you recall, we have committed that while CME, which is our largest vertical, will continue to grow, but we are also committed to create billion-plus-dollar verticals: BSFI, in manufacturing, in health care and in high tech. On the technology side, I think the way we are approaching this is as #1 on the skills side. On the skills side, what we have done is we have expanded our footprint in a lot of new [ Indian ] cities, and we also expanded our supply base overseas in Romania, Costa Rica, Latvia, Belarus, and what we consider is that, in today's environment, having a wider base. In India, we have invested in Indore, Nagpur, Vijayawada and Bhubaneswar. All I'm trying to make a point here is that your company now has some of the most spread out base for supply. On the international side, we always had Mexico. But in the recent times, we have been able to see that the Mexico has grown almost 2x. On the technology space, you would recall, we had made a big announcement regarding our investment in Blockchain. We even invested in a Blockchain company in Europe. That bold bet is now becoming a much bigger reality as Web 3.0, NFT and Metaverse become household names because our company can now go back to its customers and clearly say, when you go with us, you can grow. When they come up to the Web 3.0, your company is in a better position. Combined with our connectivity solutions around 5G and combined with some of the user applications, combined with human experience management, I think we are in a very, very strong position. On the sustainability side and the marketing side, we have partnered with Mahindra Racing to develop their next-generation [indiscernible] racing cars. We are also continuously [indiscernible] on sports tech, particularly by managing stadiums or managing fan experiences, particularly during COVID times. So I'm proud of the way Tech Mahindra continues to evolve on engineering solutions, new technology and continues to also look at green solutions. I think it's time to talk about our results. I know Milind will cover them in detail. We're very, very happy that your company is now a $6 billion annual run rate company. We have shown a sequential growth in constant currency at 4.7%. Large deals, I had committed that it will be in the range of $700 million to $1 billion...

[Operator]

Mr. Gurnani, the audio is slightly breaking from your end, sir. Please check.[Technical Difficulty]

[Rohit Anand, Senior Vice President of Finance]

C.P., you're okay now. We can hear you now. Go ahead.

[Chander Prakash Gurnani, MD, CEO & Director]

Okay. So we had promised a continued deal momentum, and happy to report deal wins of $704 million this quarter. This is the fourth quarter of $700 million plus deal wins. Very, very proud that CME has grown 6.8% in constant currency. Enterprise, they've also done well at 3.2% in constant currency. Our EBIT, I've indicated to you that average for the year would remain at about 15%. I think considering the growth, considering that we had to use a lot of subcons, the company has done well and have reported 14.9% EBIT. So overall, happy with the continued pace of our deal wins, continuing to build on our connectivity experiences, continued bets on cloud and engineers. I think, overall, your company has done well, and I am even more optimistic about future. I want to reiterate our commitment to capital allocation. We will continue to invest but, again, in a very, very disciplined way. We'll invest either to acquire or fill gaps in our engineering capability or in our [indiscernible] capability. We will continue to return cash to the shareholders. We are currently at about a result [ of still ] $1.3 billion. And I know that we will continue to generate further free cash flow. In general, I think and good all-around performance. Happy with the progress. Happy that we have added 4,000-plus associates this quarter. And I'm also very happy that Network Services is driving the growth in our communication, media and entertainment vertical. So thank you again for your support, and thank you for attending this call. I'm handing over to our CFO, Milind Kulkarni, to discuss the financials.

[Milind Kulkarni, Chief Financial Officer]

Yes. Thank you, C.P., and good evening to all. So let me cover the financials in a little more detail. Our revenue for the third quarter was $1,533.5 million, a sequential growth of 4.1% in reported currency terms. With the currency headwind of about close to 60 basis points, the constant currency growth was about 4.7%, as C.P. referred to. Growth was led by the CME vertical and was augmented by enterprise vertical. CME grew in reported currency at 6.2% sequentially, while enterprise growth was 2.7%. Within enterprise, the manufacturing, retail and HLS showed a healthy growth. In terms of deal wins, we -- as C.P. referred to, we had another strong quarter of strong deal wins, and we reported a TCV of $704 million, which is broad-based both across CME and enterprise verticals. Okay. Coming to operational performance. Our EBITDA for the quarter was about $276.5 million, a growth of 2.5% quarter-on-quarter. EBIT margin declined by about 40 basis points to 14.8%. Margins were impacted by supply side challenges around salary and subcon and lower utilization, which was a deliberate strategy we have followed to augment the people supply, especially at the lower end of the pyramid, so that we can bring down our cost of operation in the coming quarters. Okay. These headwinds were partially offset by operating leverage and some tailwinds in SG&A. The normalized SG&A for -- going forward, we expect it to be a little below 13%. Moving to EBIT. Our other income was lower than the last quarter because of the lower interest income as a result of mark-to-market losses on some of the long-term investment we have had. But since we are holding it for long term, we will weather out the yield increase that we have -- that has been seen in the last few weeks. And in long term, they will give us a better return. Now our tax rate for the quarter was about 26.9% as against 29.4% in the last quarter. Our normalized ATR, as we have always maintained, is about in the range of 26% to 27%. The net profit margin were at about 12%, a drop of about 30 basis points. Our free cash flow for the quarter was $123 million, which is about 68% PAT compared to 100 -- compared to -- a little lower than the last quarter. Our DSO have increased by about 9 days to 101, and the increase was mainly because some of our collections from a few large customers actually moved over to January due to Christmas vacation. Okay. I -- we don't really see an issue there because these collections have come in we've collected in the first week of January. So we expect DSO to come down to a normal level in the coming quarter. Okay. We continue to follow the hedge-based -- rule-based hedging policy. The hedge book at 31st December was about $2.2 billion versus $2.39 billion in Q2. Based on hedge accounting treatment, gain of USD 20 million was taken to -- has been taken to P&L. Last quarter figure was about $21.2 million, and gain of about $69 million is carried forward to balance sheet. So our rule-based hedging continues to deliver good results. We had a cash and cash equivalent of about $1.346 million (sic) [ $1,345.8 million ]. And as C.P. alluded in his remarks, we had committed to prudent capital allocation and returning excess cash to the shareholders while investing in the right areas for the future. In summary, I would just like to reiterate that we are going -- we are taking the right steps towards transforming our operations as we continue to focus on the growth momentum towards the last leg of the quarter. With these remarks, I now open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal.

[Mukul Garg, Research Analyst]

Milind, just a clarification on your comment about how we should look at the SG&A going forward. While you said that it would be a little below 13%, can you just provide a bit more clarity on the trajectory of SG&A? The sense which was there last quarter was that investment in sales will continue to be there, but there was a meaningful drop this quarter. Your cost per sales and support staff is the lowest in the last 5 years despite sales momentum in recent quarters being really good. So if you can just help us understand what -- was there a one-off this quarter and how we should look at it? And also, if you can break out the advisory and legal cost impact on SG&A given that you have done a number of acquisitions in recent past. And in last 2 quarters, there would have been an impact from that as well.

[Milind Kulkarni, Chief Financial Officer]

So you're right. I mean there were some one-offs that we have had in this quarter as compared to earlier quarters. So that's what has helped us. And that's why I said that SG&A will go back to the normal level of around 13%, maybe marginally lower than 13%. That is because of the growth leverage that we will enjoy in the -- we'll continue to enjoy. I mean I don't think we have really reduced any investment in terms of our sales and marketing. And that's reflected in our healthy growth as well.

[Mukul Garg, Research Analyst]

Right. And is it possible to provide some clarity on the legal cost? Was -- is it materially different in last 2 quarters? You've done about 2 to 3 acquisitions both in Q2 as well as Q3.

[Milind Kulkarni, Chief Financial Officer]

Not really. There's not a significant difference in the cost there.

[Mukul Garg, Research Analyst]

Right...

[Milind Kulkarni, Chief Financial Officer]

Don't have the exact numbers with me right now.

[Mukul Garg, Research Analyst]

Sure. The other question was just on the impact which was there in the BFSI and technology verticals. I know the base was already steep there. But was that more of a 1-quarter decline this -- in Q3? Or is there something different to service of other verticals like retail, which did quite well?

[Milind Kulkarni, Chief Financial Officer]

I think it was more of a furlough impact. So we should see a good rebound in the coming quarter.

[Operator]

The next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, Research Associate]

So 2 questions. Firstly, could you elaborate a little bit more on the nature of [ release ] coming in 5G? Are they more short cycle in nature and linked to the rollouts? And how long this is likely to continue once the rollouts are largely behind? What will be the key driver on growth on the 5G-related stuff?

[Rohit Anand, Senior Vice President of Finance]

Sure. Gaurav, can I request Manish to come in and talk a little bit about 5G momentum and answer your questions. Manish?

[Manishkumar Murlimanohar Vyas]

Sure. Thank you. Thank you, Gaurav, for the question. As we have been saying, Gaurav, over the last several quarters, maybe a few years now that our 5G positioning is not directed only towards network deployment. As a matter of fact, in November, we said very clearly that we will not be doing too much of the network construction and deployment activity. We will focus more on system integration, more on realization of the network from certification standpoint, more of design. And most importantly, we will focus more on the digital cloud aspect of 5G. Two reasons: one is to keep a strong eye on the commoditization that happens on the deployment side and, hence, the impact on margins; b, so obviously, we will -- we are taking a call to not go for volume but go for quality. At the same time, this helps us keep our focus on innovating on the core platform side, which is to drive more automation on how the networks will be integrated with cloud and with the varying different parts of the software architecture. Number two, we will focus on driving management of the networks. One of the deals that we signed in Q3, for example, it's a midsized deal. It is about building predictive analytics on our -- for our 5G network for their deployment work -- for the deployment and maintenance workflows. So in a nutshell, I think the -- our 5G focus both on the network as well as on the underlying platform strategy continues to remain. We're very focused on digitizing and more software and services driven. And hence, this will continue for a while because we still have a long way to go for the service providers to completely modernize their entire 5G network. And that work, by the way, will continue even beyond the RAN network is deployed over the next 2 years. Hence, the way we like to position it is that whether it is 5G or, hence, 4, 6G or otherwise, this is all always going to be about our journey around modernizing the network and the underlying platforms. That's been our strategy, and I think we're going to remain very focused on that. I hope that helps.

[Gaurav Rateria, Research Associate]

Thank you, Manish, for the elaborate answer. The second question is more for Rohit. Given the normalization of SG&A that will act as a headwind to the margins in the coming quarter, what would be the offsetting factors? And are we kind of in line with our strategy of continuing to see margin improvement at least from a 12- to 18-month point of view?

[Rohit Anand, Senior Vice President of Finance]

Yes. Sure, Gaurav. So yes, as Milind mentioned, SG&A will be in the range that we mentioned. So hence, quarter-over-quarter, that will increase. But if you look at from a gross margin perspective, as Milind mentioned, that we've invested from a longer-term basis on pyramid improvement. And I'll ask once I discuss this point and ask Harsh to also come in because that's been a strategy that he also shared in his investor communication that we didn't remember that we continue to add more pressure to the organization to change the pyramid, bring overall cost, average cost down as we move forward. It's a long-term strategy, which we need to continue to invest. But in short term, obviously, with pressures on utilization and deployment of those pressures, it has to be taken as a short-term cost. So I think we've taken that call as an organization, where we continue to look at long term. So that improvement in utilization, as we look forward next quarter and the quarter after, will get better. We said that we are comfortable with the 85% to 88% zone in utilization. So that lift should give us better traction as we move forward. And of course, from a growth perspective, the deal wins and the pipeline continue to be strong and positive. So that leverage will continue as we move forward. So hence, the levers that we articulated continue going forward into the next few quarters as well.

[Harshvendra Soin, Global Chief People Officer & Head of Marketing]

Yes, just to add to what you said, Rohit, and you absolutely articulated it well. So it is the fact that we, as a stated strategy, invested in unitization and training internal talent. But we also -- Gaurav, our strategy to go to Tier 2 towns where we established ourselves in 9 Tier 2 towns. I think seems to be working. And we hope -- we are confident that even going forward, this will be a key differentiator as well as the fact that we now have access to talent from various nearshore centers. We already established Mexico and Canada. But with our new acquisitions, Latvia, Romania, Costa Rica and Belarus have opened up. So I think a mix of the fact that we are investing in unitization and the Tier 2 towns will clearly show and make a difference for us as a differentiator.

[Operator]

The next question is from the line of Manik Taneja from JM Financial.

[Manik Taneja, Research Analyst]

Just wanted to get your thoughts on a couple of things. Number one thing is that we are seeing the industry expand in terms of Tier 2 and Tier 3 cities. So do you think that apart from taking the jobs to where the people hail from or getting access to a wider talent, does this also help in terms of managing our overall cost of employees? That's question number one. The second question was with regards to our subcontracting expenses. If you could give us some sense as to how should we be thinking about these costs both in the near to medium term.

[Rohit Anand, Senior Vice President of Finance]

Manik, so maybe I can talk about subcon first, and I'd like to request Harsh to share his views on Tier 2, Tier 3 strategy and how we're thinking through it. But on subcon, I think it's -- if you look at last few quarters, and we've articulated it that this year, we'll see the pressure of that going up through the quarters, and that's what's trended it to be. Because of the demand, the travel restrictions continue to be able to have people positioned there in those requests -- required rules, plus the timing of the deal ramping up and the need. We had to continue with that option. But as you think about the future and move forward, we've shown [ and walked ] in our November meeting also. That's a big lever for us as we move forward and will add to the tailwind over financial year '23 when we move that towards full-time employees and the leverage that we get on the cost saving there. So I think that will be available to us as we move forward. But I think this year, we continue to see pressure there. Harsh, can I request you to talk through Tier 2, 3 strategy and how we're thinking for that? Harsh, are you there? I can't hear you. Maybe you're talking.

[Harshvendra Soin, Global Chief People Officer & Head of Marketing]

Yes, yes. Sorry, can you hear me now? I'm sorry. I was speaking on mute. Manik, thank you for asking that question. And you're bang on that as part of our stated strategy a few quarters ago, we said that we will do a few things, which I think will be a clear differentiator. Of course, Rohit talked about the fact that we went into juniorization in a big way. In fact, we increased our numbers multifold there. But also, the fact that we actually decided to go into these Tier 2 towns, and Manik, there are 9 of them ranging from Trivandrum, Vizag, Nagpur to Bhubaneswar, Chandigarh, Kolkata, Indore, Vijayawada and Coimbatore. And our experiment for the last 2 quarters clearly tells us that the strategy seems to be right. We have hired almost more than 8,000 people from these centers in the last couple of quarters. But as you were saying, Manik, what we realized is that, a, not only are the average costs lower by, say, 15%, but we clearly see that our dropout rates in these Tier 2 towns are lower by almost 15%. Now obviously, this will help us on cost. But this will also help us in creating a funnel. We hope that with the acquisitions that we have, the near-shore centers like Romania -- we already have presence there in Bucharest. We have Latvia with Riga. We have Costa Rica in San Jose and Belarus. I think there is a clear differentiation that we can make. And not only are the normal skills available, but we've also seen, Manik, that even the niche skills like, say, D&A and cloud and SAP, HANA, et cetera, we've had a very good experience in the last couple of quarters. So a longish answer to your short question, but clearly, this will definitely impact positively, not only on creating a funnel but obviously also on cost going forward.

[Manik Taneja, Research Analyst]

And one last bookkeeping question for Rohit. If you could help us understand the amount of a onetime benefit that we had on in the current quarter.

[Rohit Anand, Senior Vice President of Finance]

Yes. So Manik, we articulated that at around 70 bps to the margin -- 70, 80 bps to the margin, which is across multiple line items that will come back as we think about next quarter. And hence, a countering view that we see on the gross margin improving that I articulated earlier. So I think on the balance, it looks balanced from that perspective in totality.

[Operator]

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

[Sandeep Shah, Director of Research]

Just first question is in terms of the enterprise growth. So if I exclude the inorganic [ contributions ], which would have contributed to enterprise side of the business, excluding communication, the growth on the organic front for enterprise looks lower at 1%, 1.5%. So what is causing -- because, generally, retail has a seasonal strength regarding this as a whole?

[Rohit Anand, Senior Vice President of Finance]

Sandeep, I think the organic growth is slightly higher, more in the range of -- because of constant currency impact also, it's more in the range of 2%. But yes, I think, as we mentioned -- as C.P. and Milind mentioned, from a vertical perspective, we had furlough impact in some of the geographies for BFSI and high tech vertical, which we see as a quarter blip, and it will come back from a long-term momentum perspective next quarter and as we move forward. So I think we're pretty positive on all subverticals in the enterprise siding, and even it's reflective in the deal wins. So hence, I think from a trajectory perspective, it's firing in the right direction.

[Sandeep Shah, Director of Research]

Okay. Okay. And just a question on communication. Despite the TCV wins being slightly lower on a quarterly basis, our growth has been phenomenal. So I just wanted to understand -- so Manish, we ask, is it the lower size, lower tenure deals, which are more prevalent now in the communication as well, and whether that trend will continue, which will give you faster conversion of order book to growth and whether these kind of mid- to high single-digit Q-on-Q growth in communication can continue going forward or not? Because last 2 quarters, we have done a very good job in communication, media and entertainment.

[Manishkumar Murlimanohar Vyas]

Thank you for the -- yes, thank you for the feedback, Sandeep. I appreciate that. I'll pass it on to the team. I think we discussed this -- if you and some of you recall a few quarters ago and even in November, that the agile way of contracting, of picking up a large program, let's say, modernizing a certain platform but then creating smaller milestones, I think, is something which is picking up a lot inside the telcos in the last few years, I would say. It does not mean that the larger deals are also not being discussed. They will continue to happen. But the momentum that you're seeing is based on the ramp-ups that we do on these larger engagements, but they are not announced as large deals. They're always -- I'd like to call them as agile [indiscernible], though they are very strategic and they are probably some total over a period of time are even bigger than some of the larger teams. So your reading is correct. And to your second point, yes, we are -- we believe that we have a pretty good foundation now. The last 3, 4 years of efforts have really ended pretty good results in terms of staying focused on the digital platforms, on driving customer experience journeys, on driving investments in cloud and networks while we continue to scale our BPS business and platform business. So I think our diversified portfolio that we have always been known for, I think, will continue to hold us in good stead as we go forward.

[Sandeep Shah, Director of Research]

Okay. Very helpful. Just last question is on margins. Last 2 years, we have done better on Y-o-Y basis. And we also are aspiring to do better in terms of a Y-o-Y journey in margins at EBIT level for FY '23 as a whole. So is it the right way to consider that even FY '23, with organic and inorganic growth momentum being better, even likely to be better in FY '23, the upward bias on margin movement may even continue in FY '23?

[Rohit Anand, Senior Vice President of Finance]

Yes, Sandeep. So we are similar to what we spoke a couple of months back. I think when you think about our journey, we said that we feel we have headroom on expanding margins. And when you look at the levers for us specifically, you can really look at short-term subcon cost for next year, which is easy visible headroom that we have as we move into the next year. When we think about it, the offshoring improvement that we articulated, some of it is structural versus peers. Some, we feel we have a gap that we will cover, is another headroom for us to improve. So that continues. When we think about the cost pressures, another big thing that we'd articulated was price increases. And that's something that we're trying to have a great momentum going across the business units because that is the inflationary environment, right? And hence, from a price perspective, that's an important lever that we'll have to drive. So that's something that -- value gap from a difference between price and cost inflation is something that the team is working on. And we feel confident on how we're operationalizing that over the next few months. So those levers continue for us and, obviously, the growth momentum. When you look at what we've delivered quarter-over-quarter, the pipeline, the deal wins, all that multiyear phenomenon that we've been talking about still holds true. But that itself will give us the leverage as we move forward. So yes, from our perspective, those continue. The headwinds for us are on the continued attrition where talent is tough from a supply side perspective, the cost going up, where we explained our long-term strategy of pyramid improvement, and we are investing in that because of what you see gross margin impact and utilization impact. But that's the right thing to do long term. So we're focused on that. And obviously, we spoke about the offset on price to correct that. Another area that we'll continue to see some pressure next year with COVID normalizing is on travel costs, right? So that headwind will have to be mitigated with all the tailwinds that I spoke to you. And then we'll continue to balance the mix of the portfolio between assets that are giving us low return. We will rightsize those. We will work around certain areas which don't give us a return to pull out of those operations to make sure that we drive the right mix. And that's something we're operationalizing as well. So we continue the same path when we first shared this, and we're operationalizing that as we move forward.

[Sandeep Shah, Director of Research]

Just a related extension to this, does this require a better exit rate in the 4Q margins? Because generally, in the 1Q, which may happen even in FY '20, our margin [ bridge ] because of continuous headwinds, including visa, Comviva license-related, wage inflation-related stuff. Or do you believe even a 4Q flattish exit rate gives you confidence to remain at upward -- be biased on margins for FY 2023? Because in that scenario, you may have to do a heavy lifting from 2Q to 4Q to show a Y-o-Y margin increase.

[Rohit Anand, Senior Vice President of Finance]

Yes. Sandeep, that's correct. I mean, historically, that's been the trend from a 1Q to 4Q perspective, but there's been a few changes to that. So from our perspective, we've continued to look at certain wage corrections and impaired increases even in this quarter. So we've kind of spread that out versus doing everything at one go. So we've kind of made that a little bit more spread versus everything happening in the same quarter. Second, even the Comviva linearity over the degree we've seen in the past has moderated a little bit. So hence, 4Q to 1Q, the impact will be relatively lesser. We will see an impact, but it will be relatively lesser. And you're right, visa cost and all that seasonality will continue. So while the dip pressures will be there, but compared to the previous quarters, I think that risks of differences have reduced substantially.

[Operator]

The next question is from the line of Dipesh Mehta from Emkay Global.

[Dipesh Kumar Mehta, Analyst]

A couple of questions. First of all, can you say the organic revenue growth this quarter? Second question is about the supply side management. Can you share some number? Let's say, 9 months, we added around 24,000 headcount. So can you help us understand how much fresher will be part of it and how we look fresher recruitment over medium term, maybe FY '23 or some number if you can provide and how the pyramid is getting corrected? If you can provide some broader sense, it would be helpful.

[Rohit Anand, Senior Vice President of Finance]

Yes. So I think on an organic growth perspective, our growth for the quarter is 4%. The reported number is 4.1%. Then there's a currency headwind that we explained at around 60 basis points. That gets us to the 4.7% on a constant currency. And then the acquisition impact is 70, 60 -- 60 to 70 bps that gets you to the organic of 4%, right? So that's kind of the growth rate that we're seeing sequentially quarter-over-quarter on a organic basis. Now to your question -- sorry, can you repeat your next question?

[Dipesh Kumar Mehta, Analyst]

The supply side, 9 months, we added around 24,000. If you can help us understand how much more freshers during these 9 months? And how much were from maybe acquisition related also addition? And going forward, how one should look fresher versus later addition for us?

[Rohit Anand, Senior Vice President of Finance]

Yes. So absolutely, I think, Harsh, can I request you to share the fresher addition in the pyramid that we've been working on? Harsh can add more flavor to it.

[Harshvendra Soin, Global Chief People Officer & Head of Marketing]

Yes, certainly. Certainly. Thanks, Rohit, and happy to answer that question. So in this year, we probably add about 10,000 at the bottom of the pyramid that's freshers. And the idea is to really increase it substantially as we go forward in the next year. Now you asked the question on what is our supply chain preparedness. Let me tell you that we have now got a robust engine, which does both higher from the market but also looks at internal fulfillment in a big way because that's a focus area. And if you look at the additions, you would see that we have a supply chain engine that can add up to about 10,000 to 12,000 a month. And we are hoping that this engine will ramp up even further. So we have adequate bandwidth. We have adequate, as you say, firepower to add folks and with especially -- even for the sake of repeating, I will add that our Tier 2 experiment will definitely work because what we have seen in the last 2 quarters is that not only is it helping attract talent, but also, the mix is good. We are getting niche skills, and there, the dropout rates are much lower. So to, again, answer your question, we are fully geared up. Our resourcing engine is truly geared up. We've seen a drop in attrition, which is, as you know -- in this quarter by almost 3% -- 3.3%. We see our juniorization strategy well in action. We will add about 10,000, as I said, this year and substantially more next year. So overall, I think we feel very confident on addressing the supply side challenges going forward.

[Dipesh Kumar Mehta, Analyst]

Understood. And last question is on to BFSI. If I look on BFSI, even for logic, it won't exclude 9 months performance, BFSI is relatively slow growth vertical for us. Can you provide some sense? Obviously, we did one acquisition to strengthen our overall capability, but if you can consider with equities, then how you expect BFSI growth trajectory for us?

[Rohit Anand, Senior Vice President of Finance]

Yes, sure. I think basically -- Vivek, are you in the call? Maybe you can talk about building on our discussion in the investor call and how we're thinking to BFSI segment.

[Vivek Satish Agarwal, President of BFSI, HLS & Corporate Development]

Yes. Thanks, Rohit. I'm here. So I think just from a directional perspective, if you look at what we discussed at the analyst meet, that is BFSI is one of those verticals which, we've said, we will focus on for high growth. This quarter, obviously, there's a degree of seasonality, some programs coming to an end and a timing issue. But from a demand perspective, it remains strong. We do see growth momentum across various subsectors. With the acquisition, and C.P. alluded to in his opening statement, we are creating increased focus on the insurance business. Over the last couple of years, we've now built our referenceable base of clients and insurance. We did a large deal a couple of years ago, which has fully ramped up. And with the acquisition of CTC, we're bringing in a renewed focus for growth globally. And what C.P. was alluding to is more internal organization of management time and bandwidth of creating a dedicated subvertical to drive higher growth.

[Operator]

The next question is from the line of Urmil Shah from Haitong Securities.

[Urmil Shah, Analyst]

Just a follow-up on BFS as well as the tech vertical. So was the softness in line with what we had expected at the start of the quarter? Or there was a one-off slowness and ramp-up of new deals as well?

[Rohit Anand, Senior Vice President of Finance]

So Urmil, this is Rohit, and I'll ask Vivek and Manish also in the call to chime in. But this is a part of a typical trend we see in this time of the year. So it was expected. There are certain deals that we are working on these segments that we are seeing closures soon in terms of growth momentum to continue, like we've seen in the past. So as I mentioned earlier, I would take that as a quarter blip. And over time, as Vivek mentioned, the long-term story and the growth momentum in these 2 segments will continue for us to be very strong. Vivek, do you want to add something?

[Vivek Satish Agarwal, President of BFSI, HLS & Corporate Development]

Yes. So Rohit, let me add just to a specific question. So some of the furlough softness obviously was expected. We all know, and a lot of institutions in North America, Australia and New Zealand do furlough. I mean I think the ones which are not -- which are a little unexpected was also the peaking of Omicron around the same time. And secondly, as I said to the previous question, some of it is also timing on some of the deals from -- even from an execution milestone perspective. So -- and as Milind said right at the beginning, expect a strong bounce back.

[Urmil Shah, Analyst]

Sure. And my second question was a clarification on the subcon cost. So if we see your 16% plus kind of number was last in Q3 of FY '20, but then more -- then there was a sharp reduction immediately in the second quarter. So when we are talking about subcon cost being an operating lever, was it more from a point of view of FY '23 or in the near term? And linked to that, C.P., in his opening remarks, mentioned Network Services driving growth in communication -- CME vertical. How much of the increase in the subcon cost was because of that? And if we continue to see good action in Network Services and CME, then would the reduction in subcon cost be more casual?

[Rohit Anand, Senior Vice President of Finance]

Sure, Urmil. So I think when I refer to this subcon comment, my comment will reflect to fiscal year '23. And we're just a quarter away from that. So it will -- it's a more of 12-month story that gradually will play out as the tax tactically looked at each and every area where we've deployed subcon and replaced them with full-time headcount. So it will play out a little period of time. And in terms of your other point, I would suggest that we have Manish kind of articulate, on the CME side, the growth story that he articulated earlier as well, just to add a few points. Manish, are you there?

[Manishkumar Murlimanohar Vyas]

Yes, sorry. Yes, I'm here. Can you hear me?

[Rohit Anand, Senior Vice President of Finance]

Manish, on the Network Services growth.

[Manishkumar Murlimanohar Vyas]

Yes, I think I answered earlier to go on the Network Services, which is largely being driven by -- there indeed are still some deals as we help people realize the value of the legacy networks. But those are reducing in volume and size as we go forward. Bulk of the network business is towards as we integrate software-defined network or 5G towards the cloud integration. And there is enough headroom to grow in that space. This year has been a revelation. Still early days. But if you recall in November, we had said that we will do in excess of $500 million on our overall 5G business, including largely driven by the network. Of course, there is other aspects of the 5G business as well. The chances are that we will far exceed that goal by the end of quarter 4, and we'll also potentially have enough deals in our funnel to continue to drive the growth momentum on the -- our network business. I hope that helps you.

[Urmil Shah, Analyst]

Manish, maybe I'll rephrase my question. It was more linked to the subcon cost. So that increase in the subcon cost this quarter, can a meaningful part be attributed to the growth in CME, which was driven by the Network Services? And if we expect the growth in Network Services to continue, should the moderation of subcon cost to be more gradual?

[Manishkumar Murlimanohar Vyas]

Yes. No, I think the subcon cost was not just attributed to the network business. There were also a variety of different factors, particularly the speed with which we needed to ramp up some of the new digital contracts that we were -- or the smaller projects that we were doing. So as we go and stabilize those, customer centricity comes for us, so that was a dip. As we go forward and we stabilize the engagement on those, I think we will neutralize that, both on the software, digital as well as in the network.

[Operator]

The next question is from the line of Abhishek Shindadkar from Incred Capital.

[Abhishek Shindadkar, Analyst]

Just a question or a clarification on the stand-alone business. Growth seem to be better, but margins are at almost now 3, 4 quarters low. Any color on what's happening there could be useful.

[Rohit Anand, Senior Vice President of Finance]

So you've got to look at it on a consolidated basis from a combined perspective because that won't reflect since there's interfungibility of the deals that we do from a customer perspective, right? And hence, you've got to look at it collectively on a consolidated basis to see the whole trend. And Milind, do you like to add something?

[Milind Kulkarni, Chief Financial Officer]

I don't know if in the margin, there are certain dividends which we get from the other group companies which were higher in Q2, lower in Q3. It doesn't have an impact on consolidated. But on standalone, it can have an impact.

[Abhishek Shindadkar, Analyst]

So you may be referring to the other income margins, including the other income part, right, sir?

[Milind Kulkarni, Chief Financial Officer]

That's right. That's right.

[Abhishek Shindadkar, Analyst]

No, I was actually looking at it from excluding the other income, and that's kind of dropped almost 100 basis points. I'm just trying to understand anything specific that we should be aware of.

[Milind Kulkarni, Chief Financial Officer]

Nothing. I mean we will really have to look at the consol numbers because there could be transfer pricing issues between the Tech Mahindra and its subsidiaries. So better way to look at it as consolidated numbers.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Rohit Anand for closing comments.

[Rohit Anand, Senior Vice President of Finance]

Thank you. So thanks, everybody, for joining us. As C.P. mentioned earlier, we're hoping and praying that everybody will come through this wave of COVID and be safe around it. And from our perspective, just to recap, the growth sequentially quarter-over-quarter continues with CME leading the pack. We're seeing what we had said earlier in the November Investor and Analyst Meet, we are on that journey and part of continued sustainable growth. And we will continue to drive long-term objectives for the company as we move forward. So again, thanks for joining and participating in the call. Thank you.

[Chander Prakash Gurnani, MD, CEO & Director]

Thank you, everybody. Thank you.

[Operator]

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

[Manishkumar Murlimanohar Vyas]

Thank you. Goodbye.

[Operator]

Thank you.