Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q3 FY '23 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.

[C. Gurnani, executive]

Good evening, everyone. And again, thank you for joining us on the Q3 FY '23 earnings call. We begin 2023 with a special milestone that enterprise verticals have reported a $1 billion quarterly revenue. I want to thank all my employees, customers and more importantly, the technology leaders in the company, which have continued to invest on connected enterprise and connected solutions. I'm grateful that some of our leaders have remained focused on building tools and technologies in the world of, cloud, AI and data, in the world of Metaverse and Web 3.0, in the world of newer solutions with 5G and AI and cybersecurity.

Our team had gone -- have continued to deliver record performance on customer experience management and customer experience management extends to our service offerings in BPS, and BPS also continues to deliver a record performance.

I'm also proud to thank my technology team, which has now delivered a cloud-based stack platform. It's a sector-agnostic platform which will help our clients improve their digital absorption, digital acceleration and more importantly, cloud consumption. So -- and this we have done it in a partnership with all the hyperscalers. It's just sector agnostic, and we will create value for our clients. We will partner with hyperscalers.

On the CME side, 5G continues to fuel the growth. 5G in enterprise, which is one of the focus areas, we have announced with Mahindra Group a 5G rollout at the -- one of the largest and the most modern factory, an auto factory at Chakan in -- near Pune. So it is clearly a tri-party performance, as I call it, client, a telco provider like Airtel and a value integrator like Tech Mahindra. We do believe that this will unlock a lot more opportunities for us and it will also be good for our clients because they will improve productivity. They will use intelligent and more importantly, AI-driven network solutions. And it will help our clients innovate and it will help our clients' clients run their operations smoother.

On the quarter 3 performance $1,668 million, I think it translates into quarter-on-quarter growth of 1.8% for Enterprise and for CME, it translates into 1.9%. I mean, clearly, in a normal situation, quarter 3, what is internally known as December quarter, is seen as a softer quarter, I think the company has delivered good performance.

In general, I can only say that our leader in our vertical service -- in our service offerings is BPO. They are one of our largest and the fastest-growing businesses. They probably are one of the best performing BPO companies if they were a stand-alone company. And they have done remarkable growth in Q3. And overall, also, their year-on-year growth is close to 21%.

On the operating margin side, I know there is a lot of work to be done. We are right now at 12%, but it's a commitment that our focus on EBITDA improvement or margin improvement and us being able to work on the levers, I think our confidence is reasonably high.

Our large deal team has done overall a great job. They delivered deal wins of about $800 million. We have had good large deal wins in the Americas and both in telco, doing even in the platform for the future versus we have signed a multiyear partnership with a digital wellness and a health technology company. So overall, digital transformation and business transformation has been the key to the wins that we have had this year.

I know there are broadly questions regarding the macroeconomic environment. I can only say that the company has decided that we are going to become a lot more agile. We will be looking at our operations alignment with 1,290 customers now on a monthly basis. Earlier, we used to do it on a quarterly basis. But -- and the reason is very simple. On one end, when I look at my deal pipeline, when I look at my 3 main value offerings, which is cost transformation, digital transformation and business transformation, we are still seeing probably record high deal flows. At the same time, we have seen a few clients hit the pause button for the discretionary spending. We obviously want to remain better aligned with the customers, better aligned with our back-office operations, and we want to be more responsive to our customers. And hence, we are going to go into the monthly demand and business plan management.

So again, inherent strengths of the demand is strong. Drivers for the demand are strong. And the impression that we're getting it that our investments in Metaverse, Web 3.0, blockchain, 5G and some of the platforms will be helpful. Cloud continues, AI-enabled Metaverse continues to be the best service offering right now. So we do recognize the near-term challenges, but more important is we are confident that our customer base is our biggest asset. Our workforce is our biggest asset, and we will create a much more agile organization.

So Rohit, over to you with your set of numbers.

[Rohit Anand, executive]

Good evening, everyone. Let me now cover the company financials for the quarter ended December 2022. We ended our third quarter with a revenue of USD 1,668 million versus INR 1,638 million this quarter, up 1.8% quarter-over-quarter. Adjusted for FX, the growth comes at 0.2%. Growth was broad-based with CME growing at 1.9%, Enterprise growing at 1.8% over the quarter.

Revenue in INR terms was INR 13,735 crores versus INR 13,129 crores in Q2, up 4.6% Q-o-Q. The EBIT for the quarter was at $200 million versus $184 million in Q2. The EBIT margin was at 12%, an improvement of 60 basis points. We got some tailwind from the currency which helped. We drove operational rigor as been committed, which is partially offset by certain SG&A increase.

Moving now from EBIT to other income for the quarter, we had $30 million of other income versus $36 million in Q2. ForEx gain was $15 million compared to $16 million. The tax rate for the quarter was at 27.3%. The PAT for the quarter is at $157 million. And the net profit margin for the quarter is at 9.4%, which is a 40-basis point drop from Q2, mainly because of the rate of tax at a lower point last quarter versus this quarter.

Our free cash flow for Q3 was at $31 million, which is 20% of PAT since some of the billings were impacted by furloughs. We had some FX impact on revaluation well. We had also said during last quarter that we had some movement from Q3 to Q2, due to which the Q2 cash flow was very high. That has got normalized as well. So when you look at the year till date FCF number, it's closer to $350 million, which is approximately [indiscernible] of the PAT conversion. For the full year, we still have a very strong view of FCF conversion to PAT as we move into the fourth quarter. DSO was similar to the last quarter at 98 days.

As mentioned earlier, we continue to consistently follow rule-based heading policy. As of December 22, the total hedge book is $2.5 billion versus $2.4 billion in Q2. Based on hedge accounting treatment net mark-to-market gain on 31st December was approximately, $7 million, which was taken to the P&L $6.6 million, and the rest went to reserves, which was $0.3 million.

We had a cash and cash equivalent of $780 million, which is INR 6,449 crores. We are committed to prudent capital allocation and returning back to the shareholders as per our earlier committed outlook.

In summary, I would like to reiterate that we are committed towards executing the planned targeted actions of improving profitability, even amid the near-term demand headwinds.

With these remarks, let me now open the floor to the questions.

[Operator]

[Operator Instructions] We have our first question from the line of Abhishek from Nomura.

[Abhishek Bhandari, analyst]

I basically had 2 questions. Rohit, first is on your margins. Look, this quarter, we had good improvement on utilization and the subcon expenses going down. And we had earlier thought about exiting Q4 Y with 14% EBIT margin. So maybe you could give us some of the additional levers what you think you have from here on to improve the margins further?

[Rohit Anand, executive]

Yes. Sure. So as I said earlier, our focus on margin expansion continues. From a lever standpoint, our subcon cost is still high. We have actions lined up to get that normalized, that will continue to be an area of focus for us. Again, from a comparable entitlement position perspective, we will continue to drive offshoring as an action item also. So that's the second lever we'll continue to drive.

We'd also articulated earlier that we are looking at nonstrategic assets where the margins are not favorable to us and shutting those businesses or divesting them will help us. So we continue to execute on that plan. So that action will also continue from a structure standpoint. And overall from a automation in delivery and how we optimize delivery, this is going to be a critical lever as we do more and more engagements on fixed price and as you see our large deal volume going up. An important part of that is driving efficiency but driving more tools and automation. So delivery excellence, I'd say, is the other bucket that will continue to drive margin expansion.

Then the last, but not the least is our portfolio companies or the companies that we acquired. I think our synergy with them continue to drive actions both on the revenue side as well as on costs. So I think as we move forward, that's another area that we'll continue to work on to drive margin expansion.

[Abhishek Bhandari, analyst]

My second question is on the demand comment, both CP and you mentioned that the near-term demand environment is challenging. While if I look at your order booking for this quarter, at least, it's still hovering in the range of around $800 million. So are you seeing any kind of delay in execution or the TCV to ACV translation is elongating in your deal book which might be an additional thing to keep in mind while we model our growth numbers?

[Rohit Anand, executive]

Yes. So maybe I'll answer it on what we're seeing and maybe CP can add on as well. So from a demand environment standpoint, as CP also mentioned, versus the first half of the year, definitely, there is a slowdown. The decision-making is relatively slow, people are taking more time to close transactions. Also, while our deal win number is still good, I think when we look at the current book of business, which is with existing customers, there is a lot of areas where we continue to work with them on smaller assignments and delivery engages with the clients on driving growth there as well. I think those budgets are getting squeezed as well. And those incremental small deal sizes or opportunities are reducing as well. So that conversion to revenue is much faster versus typically what you see on a large deal conversion standpoint, right?

So I think that's also playing out as the squeeze from each and every customer, depending on where they are, how their financial outlook is, how their customers are reacting to the current situation. So as that environment is panning out, everybody is reacting differently. And hence, the point that CP made that we are being very agile to monitor our actions, conditional to those customer behavior. So that's kind of a few points there. CP, if you want to add something more on the demand environment.

[C. Gurnani, executive]

No. The best is to hear it directly from Manish Vyas and Jagdish Mitra and CTL if he is on the call. Manish, you want to go first.

[Manish Vyas, executive]

Absolutely, CP. So I think, Abhishek, the demand scenario can best be described as, thereafter having spent significant amount of money on digitizing both the customer experience as well as the network, I don't think broadly speaking, strategically, there is going to be any slowdown in those areas. The modernization of the telco, modernization of the IT stack and as they continue to work on finding out where exactly is the monetizing opportunity that will come, in all of this, I think what will happen and what is happening is there will be a little tightening of the OpEx budgets to basically find new ways of delivering services.

So we are going through that process of change, the another inflection point in many ways. And as we do it, what will happen is the demand cycle will slightly change, in the sense we will start seeing lot more of cost takeout opportunities yet again which we saw a few years ago. I think we're going to start seeing those opportunities over the next, it's difficult to try and hazard a guess on time line, but maybe about 6 to 7 months from now, we'll start seeing some of these deals fructify.

While, I think we have maintained that the digital spend will continue to happen in agile fashion, in small bite-sized projects as they have been happening. So that's really the qualifier behind how the demand is going to be happening. Tightening of OpEx, slower -- or smaller deals as far as digital transformation is concerned, followed by, as we are working on, some large cost takeout opportunities in the industry. I hope that answers your question, Abhishek.

[Jagdish Mitra, executive]

So. So Abhishek, it's pretty similar to what Manish talked about in terms of the generic trends that we see in the industry. But there are obviously going to be some market and industry nuances, but we'll see. I think, for example, we already know that there has been a fairly good quarter-on-quarter deal signing for us. So from the demand side, we still see a similar robust growth on the enterprise verticals. There will be good growth expected on some of these verticals, especially retail, manufacturing, and similarly, on banking and financial services. Vivek, my colleague, can comment on that.

We will see some slowdown or rather tepidness in high tech, as you know, as they start to reorganize and look at where the spend and the allocation will be. But broadly, we see demand being quite robust, large deal inflow is quite strong, and the decision making, as Manish also mentioned, will be spread over a little more time than what we see now. So that's how I see the overall segment play.

[Operator]

We have our next question from the line of Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

Yes. I mean, Rohit, to your comment on the margin side. I mean, when I look at some of the matrix right here, with the kind of growth that we saw last year and the kind of traction, which we might see given the macro we are in, how some of these are factors that you are saying are really doable in this environment because utilization is already high for you? And then we expect the subcon also to go down. And some of the factor which you are saying in terms of divesting nonstrategic thing or even offshoring, what kind of impact those element will have on the revenue growth if those are the margin levers?

[Rohit Anand, executive]

Yes. So I think, maybe just take it sequentially. From a subcon perspective, we've articulated this that, earlier from our perspective, due to travel restrictions and certain large deals, a requirement to have a specific skilled subcon requirement, we had a higher subcon as a percentage of revenue, right? And we had clearly articulated, we have a transition plan as we move forward on substituting or replacing that or eliminating, as relevant.

So we will continue to work on that journey. And I think as we go forward, we feel we have a significant opportunity on that area. They're not just current quarter, but even getting into the next year, right? So that will be a short- to medium-term lever to continue to work on.

When you look at offshoring, again, I think while we have taken actions on offshoring to drive more and more people from onshore to offshore, but somehow the way the reduction of headcount panned out, the mix from an offshoring perspective as a percentage of total head count hasn't shown that change. So our view is entitlement perspective, we still have significant headroom to go there again in -- from short to medium term.

So this had impacted revenue on divestiture. I would say that we haven't really called a number. But broadly, I think we've done some actions last quarter. We have similar or slightly more actions lined up as we move forward. And as we -- because you would appreciate the action or some of these are a little bit structural and you have to line up a lot of aspects depending on are you divesting or discontinuing that. So based on that, how they pan out, we will continue to share the impact. But one thing is for sure, it will be favorable to the margin, and that's a big driver of our action around that portfolio, right? So those areas will continue to give us levers significantly moving forward, not just in Q4, but even going into the next year. So broadly, those are the areas that we will work on.

[Rahul Jain, analyst]

Sure. And just one more question, which is related to your active client data. It's been growing, but the pace of that has reduced significantly. So is this a conscious effort in terms of choosing the next -- net new customer more in a different light altogether, given the margin aspiration, but these are also related to some demand side things?

[Rohit Anand, executive]

So we had a conscious process and a project where we were trying to make sure that we rationalize or rightsize our tail accounts, where the size of the business is expected -- is that a particular threshold or at a threshold we expect, that we don't see a pipeline with that customer. So hence, our focus has been to continue to work on fine-tuning that list, right? So that's a conscious effort because of which we have not -- net, you don't see the increase, right?

While we have added a new customer, but we've also taken out a lot which are suboptimal and below the threshold that doesn't give us the economies of scale for expansion, but those, in fact, turns out to be more managerial bandwidth diversion action for us, right? So that's the reason why you don't see net significant increase there because of that action we drive.

[Rahul Jain, analyst]

And lastly, from a more bookkeeping point of view. The spread that we got this quarter in terms of dollar to CC was quite significant. Is it -- any specific reason for that? Or it's a general big move in the GBP or any other factor that led to this? And what we should bank for now based on the current rate?

[Rohit Anand, executive]

So I think it was predominantly -- if you see, even last quarter, we had a headwind due to currency, which was significant due to the movement we saw in [ GPB ] and Europe predominantly. And this time, that has corrected with some of these currencies moving back a little bit, right, [ GPB ] and Europe both. So that is causing the fluctuations over last and this quarter, both negatively last time and positively this time. I don't think, so there isn't a prediction of how it will pan out from an FX perspective. But as we move forward and as the rates change, we continuously do model it going forward and keep you informed on how things pan out as the quarter goes.

[Rahul Jain, analyst]

Probably take it offline because the difference still looks very significant compared to some of our peers. But thanks for the clarification and best of luck for the time line.

[Operator]

We have our next question from the line of Surendra Goyal from Citi Group.

[Surendra Goyal, analyst]

Yes. So you may have mentioned it earlier, I'm sorry if you have already done so. But CP, Rohit, could you talk about the trends in the top 5 clients? The performance year-over-year, as well as sequentially looks quite weak. And what is the outlook there? What should we be expecting in the coming few quarters?

[Rohit Anand, executive]

Surendra, thanks for the question. Yes, I think from a year-on-year perspective, you see a reduction in the contribution by the top 5 clients. I think we have a couple of customers there that are having their internal restructuring plans and focus projects that they're working on. We are partner to them on those actions and initiatives. Based on that, we see softness in those customer causing that impact. Some of it is obviously on a reported basis driven due to FX that you see last year rates versus now, it's unfavorable, right?

So on a reported basis, you will see a couple of points dilution due to that. But the second point is what I've said earlier. There are certain actions that they're working on and we are very closely working with them but that is causing us a decline when we look at it. Going forward, I think we are estimating that to bottom by Q4 probably as we move forward in terms of impact. And from there, we'll have to work closely with them to see, as CP mentioned, in a very agile resource management focus to see if we are able to support them as they change their plans on the other direction.

[Surendra Goyal, analyst]

Sure. And what is the CC or constant currency performance in the enterprise business sequentially this quarter?

[Rohit Anand, executive]

Yes, we have stopped disclosing that. But broadly, it's not much different than an overall average basis. Enterprise has a little lesser FX impact than comps, but not much different.

[Surendra Goyal, analyst]

Okay. And last question, are we seeing any meaningful change in deal durations in the TCV that you are giving?

[Rohit Anand, executive]

Yes. Yes, we are seeing decision-making to be slightly longer than what we were seeing in the past. While the pipeline is still robust, and a lot of them are towards mature state of closures, we see still from that point to final signing, it's a little bit of a longer process because people really just want to be sure on what are they committing to. Is it fitting into a probable scenario analysis for them? So we're working very closely with them. We are giving -- even modeling that for them, right? So I think there is an impact there in terms of -- and CP also articulated, the decision-making is becoming slightly slower.

And as we move forward, it's important that we continue to be staying close to the customer, so that they might be thinking -- we are making sure that we're close to that thought process as well as their planning as they look for the future.

[Surendra Goyal, analyst]

Rohit, my question was slightly different. Are we seeing less smaller deals and more relatively larger deals? So that was the context which I was trying to get here.

[Rohit Anand, executive]

The average deal size, Surendra, hasn't changed for us. It's a similar number. Maybe in the last 4 quarters, we saw 1 or 2 probably large deals. But beyond that, I think, as I look at the current quarter mix also, we have a similar, one large deal which is more than the average, which is similar to what we saw in the past. So not really a significant change in the average deal size for this time versus last few quarters.

[Operator]

We have our next question from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Gentlemen, first of all, I wanted to understand the -- this headcount reduction in the software side. We are now running at utilization, I that's even higher than pre-COVID levels and considering that attrition still is kind of above pre-COVID and probably likely to remain slightly elevated. Wondering how much headroom we have in utilization.

[Rohit Anand, executive]

Yes. So I think our pre-COVID level -- probably don't have the numbers, but I remember we've operated at a utilization level of even 88%. So I think -- so that's maybe, still headroom there. And generally, I think the view from an headcount perspective is more closer to -- as you move forward, I think it's very -- as we said, the macro environment is relatively volatile. So we just want to make sure that we are actioning -- and maybe while we are actioning closer and linking ourselves to the macro environment, the linearity of correlation between headcount and growth is also diluting a little bit.

So from -- maybe just to kind of clarify, we feel that there's not a direct correlation that you can apply on reduction to revenue, while there might be some certain linkages, that correlation is not 100%, right? As we look forward, I think while we don't give view on head count hiring, all we can say is that that's going to be very closely aligned and monitored with the demand environment that we see. And given where we are, while the pipeline is strong, overall demand seems to be kind of pushed to a longer decision cycle, right?

And what I had earlier articulated, also the committed business, they've been working on the run basis with the customers, there's a lot of smaller requests and change orders that keep on coming on that business. So that is becoming more and more squeezed, which is -- while it doesn't show in the large deal win but squeezes the revenue profile.

[Ravi Menon, analyst]

And Rohit, this quarter, it looks like the growth has primarily come from the rest of the world. The core markets, Americas and Europe seems quite weak. Europe still done some slight addition, but almost all the revenue added $30 million or so comes from the rest of the world and excluding Australia to finally consider the AUD contribution there. Even that seems slightly negative. So any comments about what drove such strong performances in India, this contract that you guys are mentioning about this manufacturing plant being -- having introduced 5G, in fact, IoT work in India?

[Rohit Anand, executive]

So yes. I mean this quarter, rest of the world has grown, but we've consciously said that we are very selective in India, which -- with what deals do we make [indiscernible]. So I think from an India perspective, it's a very margin-focused strategy. From the other regions within ROW that are seemingly doing well is, I will call out Middle East specifically, I think there, we're seeing some good momentum there, and significantly good digital deals that we're working with a customer in that region, and that's driving the growth. And that region, we feel from an outlook perspective, continues to be positive, right?

And as you look at the global macroeconomics also, next year, you will see much more pressure in U.S., U.K., generally, Europe, Germany, all the developed countries. When we look at GDP growth in all the ROW, Rest of the World countries including EMEA, Africa, Asia, et cetera, the pressure on GDP growth will be less. So as we move forward, I think it's going to be very important from a margin management perspective, that as we grow in the growth-oriented regions where there is still demand, we pick and choose the right project to drive the right profitability outcome that we've articulated to you guys.

[Ravi Menon, analyst]

Sure. But that seems to be a thought still, so the commentary from one of the larger peers who seem to suggest that U.S. and U.K., demand is still strong, and in fact they are looking at those geographies really driving growth even in this calendar year.

[Rohit Anand, executive]

Yes. No. As I mentioned, you look at the pipeline, right? The pipeline deal wins are still coming from predominantly U.S. and Europe. But as I mentioned, there are certain client-specific, top accounts restructuring that has been happening due to which we see a pressure in those geographies. I think that's also contributing for us versus maybe a general view that you've got. So maybe that's a factor from a depreciation standpoint.

[Operator]

We have our next question from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Rohit, my question is, when I look into the segmental IT services margins for the last 3 quarters of FY '23, it has been remaining stagnated at 14.5% to 15%, despite IT service utilization has gone up, subcontracting cost has come down. So is it fair to link this stable margin despite operational parameters are improving with the restructuring happening in the top 5 clients? And if yes, what is the nature of this restructuring, which is impacting the margin as a whole?

[Rohit Anand, executive]

Sandeep, maybe offline with the IT, we can look at the last 3 quarters of IT. There is some play between FX that is playing out. Maybe last quarter there was an impact on FX, but operationally it is higher and similarly in the opposite way. So we can go through that with you quickly. But generally, yes -- from a impact perspective, as we look at the growth, right, one big area is, if you look at the last 2 quarters growth overall in the IT segment versus the previous 2 quarters, there is a slowdown there, right?

So that definitely stays an impact from a margin actions perspective. While we have rightsized the organization over the last 2, 3 quarters and improved utilization, I think because of the sudden change in the growth environment, that does play an impact, right?

In terms of impact of some of the key customers and what they're doing. I think it's more an internal kind of restructuring on how they are looking at their priorities and how they are trying to re-club that in a particular fashion. So we are ensuring that we are closely working and consulting with them jointly in that process. Beyond that, I think since it's the customer-specific information, it's very difficult for me to divulge anything more.

[Sandeep Shah, analyst]

But there is no realization pressure, right? It's unfair to say that.

[Rohit Anand, executive]

Not really. I don't see there's a realization pressure.

[Sandeep Shah, analyst]

Okay. And just last question in terms of the business realignment or restructuring, where you are cutting some of the low-margin business. Last time you called out the annualized run rate is $100 million to $120 million, of which half has been concluded in 2Q. So what is the status in 3Q? And is it fair to say the margin benefit of these rationalization of low-margin business may start coming from 4Q or FY '24? Or it has already started flowing into numbers in 2Q, Q3?

[Rohit Anand, executive]

So the ones which is done is already -- started flowing 3 -- from Q2 onwards. We've had limited impact in Q3. There are a few discussions which are in progress. And as we move forward in Q4, it will continue. It's not a end that we will end the action as we end the year. I think the point is we'll continue to work on the fine-tuning and the pruning list going into next year as well. And as we do that, depending on the nature of the transactions, the margin impact will flow through immediately or with a lag. So as we conclude those, we'll communicate it appropriately to you.

[Operator]

We have our next question from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

So first question is the correlation between the deal wins and revenue growth. If you look at the last year, we kind of ended the year with a very strong growth in the deal win, which translated into almost double-digit revenue growth in constant currency terms. If you look at now trailing 12-month deal win numbers, it's kind of stagnated at a particular rate of $3.3 billion.

So how should one think about the deal wins stagnating versus revenue growth outlook over the coming 12 months? I know that you may not be able to give any guidance in the quantitative terms, but just trying to understand the correlation and conversion better.

[Rohit Anand, executive]

Yes. So I think -- I mean, we will -- I won't talk about the guidance, but maybe I articulated earlier as well. While the deal wins is still in the range that we anticipated it to be, which is $700 million to $1 billion, we do see pressures on decision-making. So that's one area to think about.

Second, as I mentioned, beyond the deal wins that we report, all that new deal wins with new and existing customers, which helps us over and above $5 million, right? So when you look at outside of that in the quarter, in the next quarter, there's lot of activity that happens with the customer on existing projects where you're able to drive more revenue, right, through -- maybe an add-on or bolt-on project, right? And that is what I was trying to tell you that the budgets have become pretty tight with most of the customers, and those opportunities are shrinking and hence the contribution that we typically used to get from those initiatives are diluting, which is reflecting in the revenue profile as well, including the demand environment.

So while the deal wins look robust, there is a contribution dilution from these areas. And as we move forward, that pressure will continue, kind of into, at least the next couple of quarters as we see the demand environment peak the way it is right now.

[Gaurav Rateria, analyst]

Got it. My second question is around margins. If you would be able to provide any margin walk of this 9 months versus last year 9 months, what would be those 2 or 3 key factors that really drag down the margins?

In this context, if you see our attrition rates have actually come down below pre-COVID levels on LTM business for last 2 quarters. So what could be the possible tailwind from lower attrition on margins one can think about over the next 12 months?

[Rohit Anand, executive]

Sure. So broadly, from a margin perspective, the biggest impact for us is, of course, people cost and the supply chain pressure we saw, right? From last 4 quarters that has had a significant impact on the overall wage bill, right? So that is the biggest dilutor on that basis. And then also, there were certain other EBIT line items, which we've articulated based on the acquisitions we did. The amortization impact flows into the D&A line item. So that also dilutes margin by broadly an 80-basis point or 1%. So that and wage bill in my mind are the 2 biggest areas in terms of margin impact that we saw.

And from a go-forward perspective, as we mentioned a couple of quarters back, most of the impact of that had happened, pricing increases was happening with a lag, and we have said that including other operating actions, will continue to drive that to improve margin from -- henceforth, as we move quarter to quarter sequentially.

In terms of attrition, it does -- I mean attrition is also going in parallel while we've done a lot of internal actions and maybe I'll ask Harsh to comment on it. But just beyond internal action, which helped us a couple of quarters, fourth, now in the recent few months, the market is also easing out a little bit, right? So you would see this spread across. So from that perspective, the impact is got to be favorable or the wage bill increase. But relatively versus what we saw last year, that impact is kind of easing out. So Harsh can add on that business trend and what we've seen in the past, this is, just for you to get a better understanding on this.

[Harshvendra Soin, executive]

Yes. Thanks, Rohit. And as Rohit said, that we've been diligently working on reducing attrition and it's fairly under control. But if you look at the market, while it is -- we see it easing up a little bit, but the niche skills are still a bit of a challenge. And therefore, we'll have to keep our efforts on and make sure that this doesn't shoot up.

The other thing that we have to do to really make it translate into real savings is going to be to make sure that we increase our unitization. We look at internal rotation, as you will see, this quarter internal fulfillment was much better than any of the past quarters. But we'll have to keep those efforts up. So the battle is not really won. I would say the journey is still ahead of us, and we will concentrate on keeping this as is.

[Operator]

We have our next question from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Rohit, just 2 set of questions. One is, just wanted to pick you brain a bit more on the BPO business. We've had very strong growth in the BPO business in this period -- this quarter, almost $20 million of incremental, $30 million that we did in this quarter came from that business. So any color on that, that what drove this growth? Is it just kind of a sustainable? Was it a large contract, which maybe you just started in this quarter, which led to this ramp up and we might see that more, a normalized growth rate, post that?

And just a question into that is, how do you tie up that very strong growth to a significant reduction in the headcount in BPO business, almost 4,800 reduction. So how does that tie up for the overall BPO growth?

[Rohit Anand, executive]

Yes. So from a growth in revenue perspective, this is typically a seasonal quarter for us where we see ramp up happening. And this time, it was significantly stronger than typically we see the trend on. So I think I'll ask Biren to comment on that because the team has done a ton of good work in maximizing that opportunity.

In terms of trend, yes, this seasonal -- there -- you need to look at the headcount movements and the impact with a little bit of lag, marginally at some point. So we would have ramped up headcount in the previous quarter, which has now reduced in the current quarter, which is reflecting in your revenue growth. And as the seasonality goes away, that headcount is reduced, right? So that's kind of the way to think about it.

From a overall growth perspective, the BPS growth levers and actions are lined up very strongly for -- as we move into the next year as well. And I think the team sees a favorable opportunity set for this set of segment for us to continue to drive positively and be very accretive to the overall portfolio. Biren, maybe you want to add a couple of more lines on your growth journey?

[Birendra Sen, executive]

Thanks, Rohit. I think on Q3, specifically, Rohit has covered it all, but if we just step back and look at what we are executing, our objective has been to lead the CX segment through AI and database automation and transformation and the challenges in the back-office businesses through, again, tech and new delivery model. So while there is overall softness in the environment, we will continue to execute well, and we should -- we're reasonably confident of ahead of industry growth.

[Vibhor Singhal, analyst]

Sure, that's really great to hear. Just my second question, Rohit, just a further clarification, you mentioned about the portfolio pruning exercise that we had taken just a couple of quarters back. So could you just maybe quantify to some extent as to where we are in terms of that exercise, in terms of our targeted -- I mean, also, you had mentioned the impact could likely be around INR 100 million. So I mean, are we through that exercise?

And also in terms of margins, how much of margin accrual have you already seen? And what is the kind of time line that you're looking at maybe for the entire exercise to maybe end or end substantially, if not completely?

[Rohit Anand, executive]

Yes. So I think we'd indicated that range, out of which I think last quarter, we'd articulated we executed a annualized run rate of almost half of it, which gave a bump of possibly around 20 basis points in margin. As we look at the next set of actions, I think, I probably won't quantify the margin impact, but it will be -- continue to be accretive from a margin standpoint and not just Q4, that action for us is going to continue as we move forward into next year as well because while we execute this, there is a continuous pipeline that we will evaluate even for next year for now.

[Vibhor Singhal, analyst]

Right. But any time line as to, let's say, first half, second half that we expect this exercise to be over? I know, as you mentioned, it might be a continuous, but a large part of the exercise, when that could be over next year?

[Rohit Anand, executive]

No. There are a lot of external factors, dependencies around this, not just internal decision-making. So hence, I think we want to make sure that we find specifically in the case of finding the right partner. We find the right partner from a strategy fit perspective of that business where they're able to drive value, given our priority and our value from -- our focus and perspective is something else.

We just want to make sure that we hand it to the right set of partner. And if we are discontinuing, then there's a different set of actions, right, which we have to drive in terms of managing the size of the book, delivery commitments to the client, liquidating that as per the company time line. So I think from a time line perspective, depending on how we go and which way we go, it might -- it will vary because of that.

[Operator]

We have our next question from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Rohit, just if you could help me understand this better. So you're suggesting that there is a continued weakness in the demand environment and the top 5 customers. But are you suggesting that -- so this quarter, we had furloughs. So one would assume that the furloughs come back, the more the furloughs has happened should come back and should sort of lead revenue next quarter. Do you believe that there's going to be weakness despite that? Or how should we think about this primarily?

[Rohit Anand, executive]

Yes, sure. So I think 2 or 3 points that maybe I'll ask Manish, to also talk about it. So I think -- in certain markets, we have seen the furloughs in fact continue not just December but have gone through January also. So some of the customers have extended it. So it had been in fact, maybe it -- might not be in the same proportion as we saw in the last quarter but the impact has been there. That's one.

Second is, I think from a top customer impact perspective, we are seeing that continuously evolve. And we -- our expectation is that will kind of be effective and reached a particular steady state by the end of the next quarter, possibly, we think, right? So I think those are the 2 drivers that are happening. And overall, I think from a high-tech tech market standpoint, it's all over the news, you would have also read it. I think there is a lot of focus on cost. There's a lot of actions that the companies are driving on the rightsizing their operations. And hence, at some point, based on the customer profile, mix, et cetera, that will continue to impact us, right?

So I think those are the broad headwinds that we see from a growth standpoint. As we move forward, of course, the new deal wins, all that adds on to help mitigate it. But on an average, right now, headwinds seems kind of a little bit more weighed in the current scenario, which is still very volatile. And with some changes, it changes very fast. So our point on being very close to the market is the reference that CP was bringing on. Maybe comp side, Manish can give you also some flavor.

[Manish Vyas, executive]

So absolutely, Rohit. Look, I mean, I think growth and demand, I hope we are discussing in context in reference of the time line. So broadly speaking, the trends in the industry, in the telecom particularly, is that there is a pretty intense -- there is already intense activity, large deals cost takeout, I mean this is one sector where, in one of the previous questions that was asked today, is in terms of the deal sizes, we do expect that some of the larger deals will come back into discussions, and they are indeed already coming back. But that could be a midterm to long term, 2 to 3 quarters from now type discussions, in terms of decisions, the discussions are going to happen now.

The vendor consolidation is going to be a big growth trend for us in the telco sector, particularly with the solid active clients we have and the presence we have in most of the mid-tier accounts as a Tier 1 vendor, even with a smaller sized telco-related positioning with that of a major provider. So that puts us in a pretty good spot to take advantage of these vendor consol, plus cost takeout.

And as we continue to drive and the new budget starts getting rolled out in different parts of the world for continuing the digital transformation because they are reassessing it as we have repeatedly said. So yes, I think the overall -- directionally, I think these are things which always have held our relative positioning in good stead. And there is no reason to feel any different about it now.

In the very, very short term, I think some of the decisions that the budget cuts have -- will induce, I think we'll indeed be there. We just don't know how long will they last. It could probably be as shortly and that maybe be another quarter. But we do believe that overall, the agile side transformation, vendor consolidation and the large deals, I think is going to be pretty positive in the long run for us.

[Operator]

We have our next question from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

I know you've already fielded a lot of questions around the margin outlook and the margin levers. But just wanted to understand, Rohit, a couple of things. While you are saying that we will see further improvement in terms of subcontracting expenses, but this is an expense item, which for us initially, has historically been higher than peers. So is there a significant change in terms of our operating model that we are thinking about when we suggest that there is more room to reduce subcontracting expenses?

And the second question was around the on-site/offshore mix or more around the utilization metrics. So when we have operated at 88% to 89% utilization rates, our on-site/offshore mix was much higher. And now you're talking about a much higher offshore mix. So do you think we have more room to essentially improve utilization despite a higher offshore mix of business?

[Rohit Anand, executive]

Yes. So maybe subcon first. I think on the subcon, as I mentioned, we have gone threadbare on each and every seg we do. Why we do it? What's the reason? Do we have the skill internally and hence we're going for it? Is it a broad customer-specific requirement? So we've gone into the highest level of detail there through which we have made time-based action depending on dependencies on a project, customer deal, et cetera, through which we've articulated that we will start these actions, starting a couple of quarters back, and you can see these back on that side of the P&L. We will continue to drive that.

There could be some new deals that will again come with that consideration, which will temporarily bump up that requirement. But from an action, focus and DNA perspective of the company, we are changing that quite rapidly in terms of actions that drive us to get this metric as close as possible to entitlement that we feel we can get to, right? So I think that's on subcon.

In terms of utilization and onshore/offshore, I mean if you look at our offshore/onshore ratio, I think we are -- have a gap of around -- significant headroom versus when we compare to the peer set. We discount some of it because of the on-site acquisitions we've had structural differences. But still outside of that, we feel there is quite a bit of headroom for us to work on.

Again, we've created a work stream where we are going individual-by-individual, project by project on who, what, name of person who's going to be moved from on-site to offshore replacement and how we're going to drive the project execution with that change, right? Because the reason I am explaining to you is, it is pretty detailed, it is pretty well governed and hence, our view on driving these metrics is positive.

Even in terms of utilization, again, we are also driving to drive that to the next level from a utilization perspective. So I think each and every increase in utilization percentage to final billing and collection to the customer, close looping the entire -- that O2C space from order to cash. So I think the rigor and governance, we are going to drive that, so that we get each and every percentage point increase in utilization reflect in the margin expansion, we will be very rigorous going forward.

Given our focus on cost and specifically the demand stretch environment, the focus on cost delivering measures is going to be even more scrutinized. So I think with that, the corporate level that is driving this is pretty high. It's just that the overall demand environment being flattish, positive, negative also drives some of the profitability outcomes. So I think we are balancing all of that as we look in the next few quarters.

[Manik Taneja, analyst]

So like through the course of this year, you had this target of getting or exiting FY '23 with 14% EBIT margins. Is there a similar target or a time line that you want to set for us to see the margins going back to that 14%, 15% levels?

[Rohit Anand, executive]

Yes. I mean we are working on this very strongly internally this quarter, team is set up to drive our medium- to long-term expectations. We have a strong working group between operating team, transformation and finance teams that drive us. We do have an aspiration, but from a guidance perspective, I am not just giving any guidance or aspiration. All I can say is that we do have levers, I have articulated the levers and our lever is going to be in general to move in the right direction of expanding margins over the short, medium and long term, in terms of how we drive our future strategy.

[Operator]

We'll take our last question from the line of Girish Pai from Nirmal Bang Equities.

[Girish Pai, analyst]

CP, in your media interviews at Davos, you were sounding a bit more positive. Incrementally has the demand environment changed for the better over the last 3 months or has it remained the same or turned worse? That's question #1. Second, the discussion on smaller deals seems to be like a little contradictory. Did I hear that smaller deals are fewer in number, conclusively now compared to, say, 6 months back?

[Rohit Anand, executive]

So Girish, sorry, CP had a hard close at 7:30, it's the schedule time and he had to rush for a customer meeting. On his Davos comment, maybe you can send the note and we'll respond back to you, okay?

[Girish Pai, analyst]

No, generally, if Manish or Jagdish can speak on, how has this moved on a 3 monthly basis? Has it improved, worsened, or been the same?

[Rohit Anand, executive]

Manish, Jagdish, do you want to take that?

[Manish Vyas, executive]

So, I think -- yes, absolutely no inconsistency. No, I think there is any inconsistencies. I -- if you clearly play back about 10 minutes ago, what I said is the overall broad commentary in terms of -- of course, we don't -- I mean I don't think -- and again, like Rohit said, you may want to check with CP if, in the commentary he made in Davos was keeping in mind 2 month, 3 months, a quarter in mind, obviously was a more strategic broad-based commentary, so is now. That, overall, the industry's belief in continuing to transform through software has risen. I think there's a -- it's not a new term in trade. I think this train is moving much faster and we'll continue to see momentum in driving more and more digital transformation across the enterprises in all business processes. And we are very upbeat about it.

So I think from a long-term standpoint, that is great. From a budgetary standpoint, there will be a little reallocation that is happening. And that, I think, is segmental. It cannot be broad-based in every single industry. My commentary was more keeping in mind some of the Tier 1 service providers versus what will continue to happen. Even there, the belief is that both the 5G-related modernization, both on the network and the stack, as well as the cost takeout, so that they could have more cash available to try and pump into the transformation initiatives, that also will be a very secular trend going forward.

So I don't believe there is any inconsistency there. It could just be in light of very specific time lines that we're talking about in the short term. But otherwise, I think the things remain as promising as they were in terms of driving and helping both business process as well as the stack continue to modernize on the -- in almost all the enterprises.

[Jagdish Mitra, executive]

So Girish, if you look at the enterprise side of the business, again, similar commentary that we spoke at the very beginning. It will -- it is starting to, obviously, as we said, the demand is growing. As Rohit said, the decision-making is a little more delayed and discussed, which means that some of these will start to play out. But the demand for technology to drive the transformational changes that we have invested in as a company, and we called it out, whether it is connectivity related with 5G across CME and Enterprise or whether it is cloud or experience or engineering or even sustainability, these areas have started to definitely create traction in the market.

And I don't think there is any consistency in the commentary that we've given. What we see, therefore is, as we said, some verticals, especially on the enterprise side will drive a much better growth with furloughs not getting impacted for Q4, et cetera. But in certain cases, in high-tech, et cetera, we've seen what the news is. So that's going to have a impact on the way we see the growth going forward. So that's how we see it. But overall demand from the client base on areas of growth, especially driven towards automation and cost efficiency goals seem to be quite robust.

[Operator]

Thank you. I would now like to hand the conference over to Mr. Rohit Anand for closing comments. Over to you, sir.

[Rohit Anand, executive]

Thank you. Thanks to everybody for joining us for the quarterly results. Again, I'll recap, constant currency growth of 0.2%, reported 1.8%, broad-based between comps and enterprise, deal wins of $795 million, again, in the range we had articulated. Margin expansion as we had said, quarterly sequentially continues. And with that, I think we will continue to make sure we drive the value creation points that we'd articulated for our shareholders and investors. So thanks for joining. I wish you have a good evening ahead. Thank you.

[Operator]

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