Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and a very warm welcome to Tech Mahindra Q4 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. Vineet Nayar, Vice Chairman, Tech Mahindra. Thank you, and over to you, sir.

[Vineet Nayyar, Non]

Good evening, folks, and welcome to Tech Mahindra's financial result performance for the fourth quarter and for the financial year ending 31st March 2018. We ended the fiscal year FY '18 with revenue growth of 6% at INR 30,773 crores or $4,771 million, up 10% and our profit after tax was INR 3,800 crores, up 35% year-on-year. The revenue for the fourth quarter was at INR 8,054 crores, up 3.6% quarter-on-quarter, profit after tax for the quarter was INR 1,222 crores, up 30% quarter-on-quarter and 108% year-on-year. In dollar terms, $188 million, up 28% quarter-on-quarter and 111% year-on-year. Our cash and cash balances stood at INR 7,774 crores, 1,093 -- $1,193 million in FY '18. With a healthy cash balance during the year, the Board was glad to propose a dividend of INR 14 per share versus INR 9 per share given last year. The total dividend of INR 14 per share would result in a payout ratio, including dividend tax of 43.4% versus 37% in FY '17. Our total headcount for FY '18 was close to 1,000 -- 112,000, we are now operating at a highest utilization level of 84% and have had 3% improvement this year. Our attrition was stable at 18%. Coming to the broader economy, the economic scenario in the world has strengthened and looks very positive. IMF in its recent 2018 outlook has predicted a global economic upswing, which will be broader and stronger. Global growth is expected to tick up to 3.9% in calendar year 2018 and 2019 on the back of strong momentum, favorable market sentiments, accommodative financial conditions and domestic and international repercussions of economic and physical policies of the United States. Advanced economies are expected to grow faster by aggregate growth in the emerging markets and developing economy is projected to firm up further with continued strong growth emerging in Asia and Europe and modest upswing in commodity exporters after 3 years of weak performance. Risk still exists, such as retreat to inward-looking policies and geopolitical challenges.Mirroring the positive economic outlook, the global IT spend outlook also is very promising. Gartner expects global spend to grow 6.2%, which is the highest and will grow it has forecasted since 2007. Further, it expects IT services and communication services spend to be much better at 7.4% and 4.3%, respectively. Before I conclude, I wanted to highlight a couple of recognitions. One, Tech Mahindra has been identified as a global leader for its actions and strategies to manage carbon and climate change across the supply chain, and has been awarded the position on the Supplier Engagement leaders board by CDP at the nonprofit global environmental disclosure platform. Tech Mahindra happens to be the only Indian company, which has got such a recognition. Two, Tech Mahindra has received 2018 AT&T Supplier Award for its outstanding performance and services to AT&T affiliates during the past year across our board -- across broad section of selection criterias, including supplier’s diversity, creative cost management, teamwork, customer service, product service, producer service performance and sustainability. The company is committed to driving innovation and thought leadership across all lines of business. With this, I will hand over to CP to expand on our business performance. CP?

[Chander Prakash Gurnani, MD, CEO & Director]

Thank you, Vineet, and good evening, good morning, everybody. I think, I mean, we all are very pleased with the performance of your company, clearly a 10% growth year-on-year approximate and a margin expansion of 550 basis points is a matter of pride and the hard work that the team has put in. If you recall about a year back, I had come to you and shared with you with some of them, both Manoj and I were on a roadshow also. And we have shared that as an organization, our focus is on growth and operating metrics, our focus in on building digital tools and platforms, so that we build the company for the future. And the number third is that we had said the most important part of our organization is people and there is a huge focus on skill and up-skilling of the people. I think on all the 3 levers or 3 pillars of our strategy, we have done well. You know that digital platforms, I mean, over a period of time, we have launched CareXa which is our customer experience management platform. Ritesh Idnani, who is our President for the Solution Group. I mean, he and Jagdish have spent a lot of time on that similarly on RPA, on AI. Our belief was always that it is not only AI outside, it is not only about tools that we partner with, we work with lot of partners, but it was always a belief that we need to have our own tools. And we have now, L. Ravichandran, who is our Chief Operating Officer, spent an incredible number of hours and time to not only deploy those tools inside, but also look at keeping those tools ready for the market. The market feedback has been very, very strong. Through the year, you saw that we have created a marketplace for the AI through Acumos. Again, Manish Vyas, who is the President of the Comm sector and is also the Chief Executive for the network services business. I mean, he has taken it as a KRA to build Acumos even further. So overall, I can only say is that the list of number of tools that have got developed, they were all demonstrated to the industry analysts on 10th and 11th of April. Jagdish Mitra and rest of the management team choreographed the program called TechM Nxt, which is about creating platforms, which is all about creating the future of enterprise, future of network, future of telecom and future of cybersecurity and how we will work with the ecosystem of new age companies, the ecosystem of existing and strong partners like Cisco or an SAP or an Oracle or a Microsoft and continue to build in partnership and ecosystem, which could continue to help us become more integral to our 1,000 customers. Coming back to this quarter's performance, I think, the quarter performance, Vineet and Milind will -- already share with you that as a year, FY '19 (sic) [ FY '18 ], our enterprise business grew 19.1%. Manoj Chugh and some of the other leaders have done an incredible job of continuously growing our enterprise business. I think overall, our digital business has grown by almost 500 basis points, it used to be 22%, it is close to 27% now. We also added about 70 active customers in FY '18. We have more or less been very, very ruthless on only one part, which is an execution of our strategy on run, change and grow. We have shared this strategy with you in the past. I can only show you the results. This time of the year, last year, my run business was 60%, my change and grow business was about 40%. Same time this year, we are now talking 43% of run business and 57% of change and grow business. It only shows that the strategy of transformation is working. Both Manish and Manoj have shared with you in the past, our mantras for success, which is 343, very simple, but clearly demonstrates what we're doing and what we are not doing. Because clearly, the business of not doing was also a focus area this year. As you know, that in comms business, while we've had a flattish growth, I personally think that this growth has to be taken with data point, which is Manish closed about 100 million of low yield business or a noncore business. Manish Vyas says that 100 million, if it had remained in the kitty, it would have been another 5% growth. So my point is that I'm very happy with the performance of the communication sector. Clearly, the outlier has been the enterprise business, but overall a great, great year. Going ahead, I think I mean, TechM Nxt is a global program. It is taking into account to continue our focus on IoT and cloud, continue our focus on data sciences, but put in an extraordinary focus on AI, extraordinary focus on Blockchain, extraordinary focus on cybersecurity and the last, but not the least, the network of the future. And as you know, that we will continue to make investments, both internally on adding more products and tools to these competencies and they are being adopted by BPS, they're being adopted by President Baksi, for some of his AI infused solutions for Indian defense or AI-infused solutions for the smart cities. But the point is that there is no solution which doesn't go through a filter of IoT, cloud or an AI or a Blockchain. And I think, overall, the company focus on digital, company focus on adding value is clearly showing results. TechM Nxt, also means centers of excellence. These centers of excellence, whether they are based in Bangalore, whether they're based in Silicon Valley or they are based in Dallas or they're based in Israel or they're based in Canada, I mean, these are the areas where your company has set up centers of excellence and we partnered sometimes with the universities, we have partnered at times with the local entrepreneur ecosystem. But overall, TechM Nxt, is all about creating an ecosystem and giving better solutions and better opportunities for run, change, grow to our clients. I generally would like to say that our outgoing CFO, Milind, because of his superannuation age will be stepping out and handing over the charge to Manoj Bhat as one of the youngest looking CFOs in the world for a $5 billion -- almost $5 billion company. But Milind has also agreed that he will continue to support your company on various initiatives, so while he would not be signing the balance sheet, but I'm very glad to say that Tech Mahindra will continue to leverage on his, not only deep experience, but also his mentoring of Manoj Bhat. And why I consider Milind and the finance teams or the leadership teams' contribution for delivering an excellent performance on the operating metrics. The levers are very simple: 1, is learning to say no; #2, levers were that if there is an AI inside or an AI outside, we will look at the tools, automation and deep machine learning internally as well as externally; #3, was better business mix, better yield management and finance actually becoming more involved in the business instead of looking at only the accounting side or the taxation side or the treasury management side. So I think, I mean, Milind and his team have done an incredible job. On behalf of everybody, I do want to thank Milind for his notable achievements and notable contributions to Tech Mahindra. So while I -- now I welcome Manoj Bhat in his new role. And Milind, you may not be signing the balance sheet, but you clearly have 1 duty to do is to explain this year's numbers to the analysts.

[Milind Kulkarni, Chief Financial Officer]

Thank you, CP, and good evening to everyone. Let me take you through the financial highlights for the quarter and for the year ended March 2018. I'm happy to say that our upward trajectory continued for the fourth quarter in the row. Revenue for the quarter was about $1,244 million versus $1,209 million, a growth of 2.9% quarter-on-quarter and 10% year-on-year. There was a cross-currency tailwind of about 120 basis points quarter-on-quarter and 380 basis points year-on-year. Now, so the, Q4 revenue growth in constant currency term was 1.7% quarter-on-quarter. The EBITDA for the quarter was $217 million, which is INR 1,412 crores versus $197 million in Q3. EBITDA margin for the quarter was 17.5%, which is a margin expansion of 120 basis points quarter-on-quarter. The expansion was due to improvement in utilization, seasonal mobility -- seasonal tailwind from mobility business and improved business mix and a favorable currency, almost all contributing more or less equally. The other income for the quarter was about $69.7 million against 35. -- $35 million in Q3. This included onetime gain on sale of our land and building in Bangalore, which was about $14 million and a higher ForEx gain of about $27 million as against $16 million in the previous quarter. The interest income rose by about from $10 million to about $16 million during this quarter. The depreciation and amortization for the quarter was about $46 million as against $43 million in the previous quarter. And the depreciation is higher mainly because of the software purchases for internal use, which we depreciate fully in the year of purchase. Net profit after tax was about $188 million against $147 million in Q3. In INR terms, the PAT was INR 1,222 crores versus INR 943 crores in Q3. Now, if I come back to the statistics for the full year, the revenue was $4,771 million versus $4,351 million, up about 9.6%. If I exclude the -- there was a cross-currency benefit of about 180 basis points due to depreciation of USD against major currency and the constant currency growth was about 7.8%. Our enterprise business grew about 19 -- I mean, as CP mentioned 19% year-on-year and communication business was flattish. Full year EBITDA margin improved by 90 basis points from 14.4% in FY '17 to 15.3% in FY '18. And this is despite 3% rupee appreciation, a margin impact of which is about 50 to 60 basis points. And also, we absorbed the hike in the wage hike effective June 2017, for people into -- people about 6 years’ experience -- 0 to 6 years’ experience bucket. Now the tailwinds came from improvement in utilization, improvement in productivity, then improvement in performance of portfolio companies and an improved business mix. All 3 factor almost contributing equally. Our cash flow generations for the quarter as well as for the year continues to be healthy. Cash flow from operations for quarter 4 was about $164 million, about 76% of EBITDA versus $151 million in Q3, almost 76% EBITDA gain. The CFO for full year, cash flow from -- free cash flow was USD 580 million, about 79.5% of EBITDA versus $542 million against -- which was about 87% of EBITDA in FY '17. We generated free cash of about $429 million in FY '18 versus $397 million in FY '17. Despite some outflow of about $53 million on an IP deal during the year. Cash and cash equivalents were $1,193 million as against $950 million in December '17. Net of borrowing of about $368 million, and net cash was $825 million. Our hedging strategy, which we have followed consistently continue to serve us well. As on March end, we have hedges about $598 million at INR 71. This is U.S. dollar basis. Then sterling hedges about GBP 229 million at INR 94.4 and euro hedges of EUR 244 million at INR 85.4. Now this is -- I mean, much higher than the spot rates on those days or even spot rate as on today. MTM gains on outstanding cover as on March were USD 26 million and half of it based on cash accounting treatment were credited to P&L and half of it carry to the balance sheet. Now the equivalent number of last quarter, which was carried to balance sheet was $52 million and this is because of the depreciation of USD or appreciation of either currencies against USD. Now tax rate for the quarter was 18.6% and this was lower than the normal tax rate for -- and this was primarily due to tax benefit, which resulted from NOL of one of our U.S. subsidiaries. The -- as you know, the last quarter also we had a lower tax rate because of some of the R&D benefits which in the U.S., and some other developments. So the overall tax rate for the year was about 22.4% as against 26% last year. But the normalized tax rate is going to be somewhere in the region about 25%. Tax for the full year was $588 million against $419.5 million, which is up about 40%. Now if I were to conclude the year, we have ended FY '18 on a happy note, having improved EBITDA margin through the year and having grown the EBITDA business at 19%. The communication business though look flattish, but if we exclude some of the growth outside network, some of the business which we gave up during the year again has been quite satisfactory. Margins have improved over the year, but we still have margin levers like automation improvement in performance of the year in our portfolio companies and maybe right-shoring, okay. But the improvement going forward is likely to be gradual and not as what you have seen in the last year. As Vineet and CP mentioned, because of the improved performance, the Board has recommended increase in dividend to INR 14 per share as against INR 9 per share. This translates to a dividend payout of about 43% of profit versus 37% last year. With this remarks, I will open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Pankaj Kapoor from JM financial.

[Pankaj Kapoor]

My first question is on the [ deliverance ] the TCV seems to be stagnate at about $1.2 billion, $1.3 billion for 3 years now. So how should we look at it? I mean, is it because the pipeline has been stable or is it that your win rates have come off a bit as you may have become more selective in picking up the deals, so that to ensure that the margins are not impacted?

[Chander Prakash Gurnani, MD, CEO & Director]

Pankaj, thank you. I'm going to request Manoj Chugh and Manish to answer this question. Manoj, you want to go first?

[Manoj Bhat, Deputy Chief Financial Officer]

Yes, CP. So I think, that we are -- obviously, we are in a competitive marketplace and our goal is to find ways in which we can add value, particularly through injection of digital and what we call in TECHM, wave 2 technologies. So I think, as gradually we increase the proportion of digital, things will hopefully look better going forward in the future.

[Chander Prakash Gurnani, MD, CEO & Director]

Manish, you want to add?

[Manish Vyas]

Yes, I would just add, Pankaj, thank you for that question. I would just say, I think, you heard CP earlier saying that we have also begun to learn to say no. So we've obviously become more selective from a funnel standpoint. And at the same time, like Manoj is saying that the digital or the wave 2 technology, the next-generation technologies also demand that some of the opportunity sizes that we are winning not from our perspective, but even from a customers' standpoint are going to be relatively smaller to start with. But that said, we are quite comfortable and confident about the overall deal flow, the overall funnel and the overall activity in the marketplace with the number of accounts that we are engaged, and we don't see that as a point of concern at this time.

[Pankaj Kapoor]

Sure. So, Manish, last year, there were some pricing reset that we had in few of our large telecom accounts. So I just want -- curious to know how have been that negotiations this year. I mean, is there something that you are hearing from the clients or push on the pricing is normal this time?

[Manish Vyas]

Yes, I think, there is always competitive pressure and every single day it only becomes more intense, Pankaj. But the one-off big refactoring that happened is not something that we are currently engaged in our [indiscernible] while I cannot predict what may happen next several quarters. But clearly, that's not something that we are dealing with at this point in time.

[Pankaj Kapoor]

Sure, and I should also ask the customary question on 5G outlook, when do you see the signs of spend picking up there, any update?

[Manish Vyas]

I suspect I may also have to give you a customary answer on 5G. But it clearly continues to remain by far the most important initiative, not just for the telecom industry, but for all practical purposes the -- across all industries are watching what exactly will be the 5G rollout time line. And the industry remains very busy right from defining the standards to finalizing the technology stack, both on the radio as well as on the core side and the other interfacing technology. There are, as you may have read, that there are couple of operators we have announced more than 1 time. But, so it is still very, very difficult, like I have said earlier, to exactly predict whether it is a 2019 spend or maybe later. But the activity in the industry is extremely intense as we speak. There's not a single major operator that is not busy right now, trying to finalize their road map.

[Operator]

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

[Sandip Agarwal, Vice President]

So I have 2 questions. Manoj can also chip in if he wants, but more to CP, 1 on the enterprise side. We are seeing quite a very robust growth. So I would like to understand what is happening there because this data is totally different than what we are seeing in the industry. Obviously, industry is also showing great signs of recovery and a very clear signs of recovery, but our growth has been quite robust there. So what is helping us, is it our different set of clients which we are targeting in the sense that we are targeting mediocre size of client, which probably the large, very large players are not into it or we are getting a geographic advantage on that side? And secondly, telecom, I agree that there has been some businesses, which we have said no and that would have impacted our growth. But still the numbers are not looking great. So is it the lag effect of turnaround, which maybe playing out right now or it is very unclear whether there is a turnaround, so any trends on that?

[Chander Prakash Gurnani, MD, CEO & Director]

Sandip, very, very critical questions. So let's go back into the enterprise business. I mean, let's compliment Manoj, Ritesh and Manish, and Sujit Baksi, which are basically leading the teams from the front. There is no enterprise business without communication business. Because the world is so connected that frankly, these boundaries that we have created are man-made. Today a health exchange or a talent exchange or an IoT platform or a factory of the future, all of them the bedrock is connectivity, the bedrock is communication. The second part is I want to compliment Ravi and his team because the company has invested a lot in platforms. The company has invested a lot on the tools and the company continues to modernize. So as I spoke to you, Sandip, a little while ago, when I said 10th and 11th of April, Jagdish Mitra and -- as a team had created a 2-day conference, which talked about TechM Nxt. In TechM Nxt, we showed enterprise of future, network of future and we also demonstrated how all of this is being woven together by us marrying the ecosystem. Customer is the key, customer is the focus and we come in through a network or an ecosystem effect of the new age companies, you guys may call it startups or the companies which are mature, whether they are called HP or whether they are called Cisco or Microsoft or Oracle or an SAP, we work with all of them to create solutions. Number third is that our acquisition strategy has become a lot more digital focused, whether it was Pininfarina, whether it was Bio, whether it was HCI. I mean, HCI is all about EMR. Bio is all about customer experience management, Pininfarina is all about digital engineering. So I think, we have become a lot better in that area. And last, but not the least, I mean, we have some incredible people who are able to deliver incredible results and it is true for telecom, it is true for enterprise. And telecom, I don't think we are doing badly. It is just that we have rearchitected our strategy and I think it is coming into play. There maybe 1 or 2 quarters of lag, but I am more confident that this company is made by communications and telecom and they will lead the business.

[Operator]

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

[Gaurav Rateria, Research Associate]

Two questions from my side. Firstly, on the communication 5G cycle, do you look at this cycle to be very similar to what it was in the past or do you think the nature of the spend will be slightly different, what are the nuances to that, if you can help us understand? And second question, if you can throw some light with respect to performance on your acquired companies in the last year, have they been tracking as per your expectations or even better than that?

[Chander Prakash Gurnani, MD, CEO & Director]

So Gaurav, I don't know how much detail I need to go into on 5G. So I can only give you a very broad brush answer. And I promise you I'll give you a lot more details when I meet you guys in August. The 5G is a technology, which will not have a uniform adoption. You have seen the technology, even 4G or LTE being adopted very differently by 2 Indian leading operators, one is Airtel and one is Reliance Jio. So 5G as a matter of fact is a lot more open, a lot more amenable to software defined networks. And we will see different adoptions as we go along. Your company has invested in an ecosystem. Many of these have been already been made public, but you will hear more about it in the next 2 quarters. And I can only say is that, while the big players, the big OEMs will have an advantage, but company like Tech Mahindra will also get a slice of that market, and that market whenever it matures, will be huge. Manoj, you want to add the -- because the way -- the world I live in, Gaurav, the day I acquire the company, 3 months later, it becomes part of the organic. I mean, so I have never been able to say though I know financially Milind is more focused on tracking individual performances, but from my perspective, they are all Tech Mahindra. After we do the acquisition, and 1 or 2 quarters later, we have the integration plan, the transformation plan, the growth plan and the synergy plan in place.

[Operator]

The next question is from the line of Ashwin Mehta from Nomura.

[Ashwin Mehta, Executive Director of Research]

I had one question in terms of the other segment, that has grown pretty well for us. How sustainable is this growth and what is the driver for this growth? And just a follow-up in terms of BFSI, that is 1 segment which had been growing pretty well in the past for us. But now seems to be decelerating, it’s down to 1% to Y-o-Y growth. So what exactly is happening there and how do things look going forward?

[Manoj Bhat, Deputy Chief Financial Officer]

Hi, Ashwin, this is Manoj. So first, let me pick the others question and then I'll request Manoj to answer the one [indiscernible]. So from a perspective of others segment, I think, clearly, what we club under there are the -- some of this used to be small, but they are becoming bigger. For example, right now if I look at this quarter, there is -- if I look at healthcare, there is a large implementation cycle and the kind of go-live cycle, which we are tapping into. And clearly, there is -- as with most of these cycles there will always going to be a period of time where the growth will come and then there will be a period of volatility till the next kind of implementation starts. So that is driving growth and that has been driving growth since -- there was some growth in Q3, there is good growth in Q4. And I do expect that there will be continuous growth in Q1 also. But beyond that, I think, it's something which, this is an implementation cycle business. So that's part #1 of the question. And we believe that these are based on various clients going through their project life cycle and we are assisting them in various parts of that life cycle. I think Manoj, you want to pick up the 1 on BFSI?

[Manoj Chugh, President of Business Development]

Yes, Manoj. So on BFSI, one of the key bets that we have placed on is around wealth and core banking transformation. And when the transformation deals come in, there is a point of hectic activity, which goes on for a couple of quarters, and then we get on to what we call the BAU stage. So you will find that as we win these deals, there will be some quarters, where we go through the aggressive transformation piece and then we move to BAU. I think that is the nature of the kind of business that we've decided to focus on. We believe it is the right thing for us to do. So you will see, longer-term, if you take a multi-quarter approach, you will see our business continue to do well. But yes, you would see certain quarters to be softer than the others. But we want to stay with the strategy that we are in. I think we're in a sweet spot, we're clearly differentiated and we are winning.

[Ashwin Mehta, Executive Director of Research]

Thank you. And just one question on margins. You would see wage hikes, Visa and Comviva seasonality in 1Q, what is the impact that you see of that going into the next quarter, ex of any currency impacts?

[Manoj Bhat, Deputy Chief Financial Officer]

So, clearly, I think all 3 are coming in 1 quarter. So there is going to be -- there will be an effort to mitigate some of it. But I think, we have always seen that Q1, definitely there's a margin impact because all of these coming together in the same quarter. And that's what I expect to happen even in this scale. And beyond that, I think, whether currency mitigates it to a certain extent, but as of now it looks like if I consider the magnitude of each of this, there is a significant impact going into Q1, which we know today.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal.

[Ashish Chopra, Research Analyst]

First of all, Manoj, congrats for the elevation, and Milind, thanks for all the support. My first question was actually on the rationalization of onsite offshore on that you mentioned as one of the levers. So just wanted to understand in terms of the scope, since for us the on-site mix is relatively higher than peers because of acquisitions and other factors, so what could be the kind of scope and what kind of a mitigant or tailwind to the margins could that be?

[Manoj Bhat, Deputy Chief Financial Officer]

So, I think, so clearly, the way to look at it, I'll split it into 2 parts, right. There is a portion of the business around digital, which is more on-site in nature. There are some of our acquisitions, which also contribute to a higher on-site percentage. Over a period of time, I think, what we have seen is that once we start a digital engagement, probably 1 or 2 quarters down the line, we start seeing some of the movement offshore. But on the other side, on the portfolio companies, I think, some of this nature of work might remain offshore for a considerably long period of time. For example, let me give an example, if I look at even Pininfarina after some almost 1.5 years, 2 years, we have now a PF India with about 60 people. So it takes that time to actually start integrating and pulling together the offshore piece of it. So my sense is, while it is a margin lever and it will play through, but it will probably take a few quarters for that to kick in. To me, actually, the more immediate margin levers will continue to be one is, if I look at the whole portfolio company journey, I think, we had a good start. I think we have taken certain corrective measures. But I don't think yet the synergy benefits and the working together with an integrated Tech Mahindra and the related benefits on margins have flown through, so that's going to be a key lever going forward. The second thing is, I think, and I have mentioned this in the past that with every going quarter, I think, our investments in introducing our automation platform and customer projects is something which is continues to increase, and that is something which we expect to flow through during the rest few quarters. And lastly, I think, we mentioned this in the past. I think we continue to look at our workforce profile and pyramid structure that something, which we'd expect to start kicking in also during the next three quarters. So to me, that's the journey. But as Milind mentioned, I think, we have had a very good 4 quarters in terms of margin improvements. And Q1, as I mentioned, is going to be -- there are headwinds to the margin. But then, I've also mentioned that it is an 8-quarter journey, but the increase might be more gradual is what I feel.

[Ashish Chopra, Research Analyst]

Fair. And secondly, on the headcount, so we've seen that the decline has also been in the sales and support. So just wanted to understand if there has been any change in the go-to-market approach that has led to a sort of rationalization or could it be the redundancies created from acquisitions or if there's been any reclassification, some color on that would be helpful?

[Manoj Bhat, Deputy Chief Financial Officer]

I don't think there's any reclassification, which I know of. So to me, the big thing is that as we go through some of these things, I think, we do periodic look at what is the kind of support investment required for the business and how much can we rationalize over a period of time. And that's the way to look at it. I don't think you should look at it beyond that. So something which, I think, you should expect to see on a periodic basis, we will continue to do across various parts of our business.

[Ashish Chopra, Research Analyst]

Sure. And just lastly from my side, the DSOs are close to 102 days, do you see a scope for that to improve going forward because it's been in that range for a while now?

[Manoj Bhat, Deputy Chief Financial Officer]

My immediate answer would be yes. There's a lot of focus to improve that. But I'm also very conscious that what we're seeing is across our customers basis, it demands some customers to actually use payment terms as part of the negotiation process. And that's the counter kind of balance to all our internal efforts. My expectation, our goal would be to improve this DSO days over the next four quarters to reasonable number of sub-100 is what I would say, yes.

[Operator]

The next question is from the line of Shashi Bhusan from Axis Capital.

[Shashi Bhusan, Executive Director of IT and Telecom]

On 5G, you talked about early signs of increased activity among your clients. So are we part of these early discussions, which will give us some visibility either in later half of FY '19 or early FY '20? And how significant it would be in terms of the impact on our revenue trajectory, can we expect our revenue trajectory again to go back in communication vertical where we were say, few years ago?

[Manoj Bhat, Deputy Chief Financial Officer]

And I'll request Manish to pick this question up, Manish?

[Manish Vyas]

Sure, absolutely. So Shashi, I think, the answer to the second question is a bit more difficult to answer and predict at this point in time. Except that I would want to say that, yes, there clearly will be a positive impact to how our business will shape up as a company. To your earlier question, whether in the earlier acquisition activity that is going on across the board on the 5G evaluation and the trial, yes, the answer is yes, we are engaged in several instances. And like CP mentioned, the 5G technology rollout is not going to happen exactly how the previous generation happened. Not only are they going to be very nonuniform, 5G also has a very different conversation in different parts of the industry. There is an impact on the access network, there is an impact on the goal of the network, but there is also an impact on the application and the underlying system that will support and will have to be integrated for the 5G business. So we are very busy in different areas, and which is the best part and the beauty of the investment that we have made over the years -- that right from the network of the future to the digitization and IoT. And also, the customer experience transformation, we are pretty much engaged at all those 4 different levels. And which is where the opportunities will come because this 5G what will also change is the service line for the service providers and what will also change will be the business models. So that said, your company is going to be finding itself in a very, very exciting position. How exactly will that pan out, I do believe, I think, we are -- these are early days at this point in time. But come next couple of quarters, we definitely will be able to discuss in more details with you.

[Shashi Bhusan, Executive Director of IT and Telecom]

So 2 parts to it. One, you're talking about integrating lots of other services and the [indiscernible] things into the system, which doesn't exist. So obviously, it requires lots of new spend. Second, we expanded our service portfolio also which caters end-to-end now right from the network design to OSS, BSS and then VAS as well. So we are now targeting much bigger pie, is my understanding right?

[Manish Vyas]

So we -- I mean, we have always -- if you go back couple of years ago, we have always said that we have invested in 6 pillars, which basically means that we are playing in multiple different areas of ecosystem.

[Shashi Bhusan, Executive Director of IT and Telecom]

Manoj, on the wage cycle, is it going to be spread out in 2 quarters or is it just going to be 1 quarter wage hike?

[Manoj Bhat, Deputy Chief Financial Officer]

I think they are going to distribute it over the -- so it will be Q1 as well as in Q2, that's what the plan is.

[Shashi Bhusan, Executive Director of IT and Telecom]

Okay, and if currency stays at the current level, say almost like 5% depreciated from where we reported, would it mitigate the margin impact because of Comviva, Visa and wage hike? And also the trajectory of improving margin, although gradual would continue through FY '19, if my understanding is right, is what you said?

[Manoj Bhat, Deputy Chief Financial Officer]

So I think if the rupees stays here, potentially, on a full year basis, it could. So that's -- because the math is pretty clear. 5% is roughly 1% give or take, right? So that will definitely help us in mitigating -- the Comviva is really for us what is happening is it's all coming together in Q1, and my commentary was very specific to Q1, that Q1 is when we're feeling the margin headwinds in terms of all 3 coming together, yes.

[Operator]

The next question is from the line of Rahul Jain from Emkay Global.

[Rahul Jain, Senior Research Analyst]

Firstly, thanks Milind for your insightful input all these years and congratulation Manoj for the new role. My question is related to the opening remarks by Vineet, where he alluded that renewed forecast by Gartner across our focus vertical, so have you seen that kind of [ flip ] in our own client conversation, deal market or in general environment that we deal in?

[Manoj Bhat, Deputy Chief Financial Officer]

What I'll do is I'll give it back to Manoj Chugh to answer what are the sorts of customer discussions and engagements we are having in terms of our overall funnel and whatever we are dealing in terms of our client’s engagement. Manoj, you want to pick up the connection between what Gartner is saying and how does it translate into our conversations with customers in terms of...?

[Manoj Chugh, President of Business Development]

Yes. So, Rahul, what we have done is across each of our verticals, we have defined our overall strategy around 343. 3 trends, 4 bets, big bets that we are making in that specific vertical or in some cases sub-vertical. And then how's that going to help our customers run, change and grow. As we look at the 4 bets, we're finding that they're resonating very well with the market. We've got validations done on the bets that we have chosen with reputed analysts in the marketplace because we did not want to be blindsided. What we're doing at this point in time is re-looking at our overall solution set, which feeds into these big bets and working to make them more robust, in some cases, co-creating solutions with our customers and taking them to market. So I think, we are headed in the right direction. The bets that we have chosen are validated, our solution sets are coming together. And therefore, the conversations that we're having with our customers are related to the heart of where their business is and which is in terms of helping them transform. Obviously, the results will come in over a period of time. This is a journey. And we're very aware of that.

[Rahul Jain, Senior Research Analyst]

So 1 just incremental thing is that -- so obviously what you said we've been working on this for some time and these things are evolving. But I'm seeing -- is there a sudden kind of a hint where we see renewed optimism in terms of the way people approach?

[Manoj Chugh, President of Business Development]

Yes, so let me take an example, Rahul, because I think an example is the best way to explain. So within manufacturing, we identified a Factory 4.0, which is a coming off IT and OT together as an important area. They are many organizations across vertical segments are focused on and making investments. There is a significant impact in terms of reduction of COGS and obviously in terms of the ability to do mass customization, wherein one gets to achieve 4.0, right. So we have identified that as a big bet. We have created an ecosystem. CP spoke about that across sensors, networks, applications, manufacturing execution systems, ERP and so on. And that is what we are taking to market. And we're seeing very good results. Obviously, we have to go customer by customer, factory by factory and start implementing and educating. A second example would be of servicification of products. Again, they'll be bringing sensors, networks, applications, analytics, and so on to be able to take a product and build a service around that and in fact sell that as a service. So physical becoming service. So there are many examples like this, which we are taking to market. They are very relevant, they are very current. They hit at the gut of the business of our customer. But I think it's a question of our coverage taking it to market and executing one by one by one. I think we got the recipe right.

[Rahul Jain, Senior Research Analyst]

And from the hiring perspective, what are the plans as we have seen significant rationalization in the headcount and also from an employee cost base perspective, what could be the split in terms of the wage that will get hike in Q1 and Q2, respectively?

[Manoj Bhat, Deputy Chief Financial Officer]

On hiring, the way we've changed our approach is that, I think, we're looking at continued just in time model. And as we alluded to you before, even in our second Nxt program, I think, we are looking to encourage a network of -- or an ecosystem of various partners who can actually provide business when we need them. But I think you should expect that the endeavor would be to model our recruitment around or resourcing around broadly adjusting time [indiscernible]. We will have a few pressures joining in quarter 1 and quarter 2, which is more of the long-term plan to actually manage the overall pyramid. So that will be one change you will see. I don't think there have been too many campus recruits in the past 2 quarters, so that's one change. I think in terms of the wage hike, I think, there'll be half and a half kind of impact from a dollar perspective. And roughly maybe 60% of the people getting it in quarter 1 and the balance in quarter 2. That's what it looks like.

[Rahul Jain, Senior Research Analyst]

Okay. Just lastly, if you could on the effective tax rate that we see in FY '19 and '20?

[Manoj Bhat, Deputy Chief Financial Officer]

I think the effective tax will be about 25% give or take. Of course, this year had been much lower because there have been R&D tax credits we have got in various jurisdictions. I think in one of our subsidiaries in the U.S., we did a revised estimation of net operating loss and that quarter benefit. So there are many pulls and pressures in the tax rate. But overall, I think, it should be about 24.5% to 25% is what I would assume next year or this year, sorry.

[Operator]

Due to time constraints, we'll take the last question from the line of Vibhor Singhal from PhillipCapital.

[Vibhor Singhal]

Manoj, my question was majorly on again, probably different question on the employee pyramid and the utilization. So I think, for the past 3 quarters, we have seen that our overutilization, including and excluding trainees has been the same. So virtually signaling that there are literally no trainees in the system. So I just wanted to develop on this that is the new paradigm of software development that we're looking at, that because of maybe aided Agile or DevOps we don't need that many trainees in the system because the way we have seen traditional companies for work is that we need a bench strength to be able to ramp up whenever a project comes in and people to be trained in those kinds of development environments. So do you foresee this continuing or maybe just a small gap between the 2 utilizations, or do you see as a result of, let's say, just as outcome of you not hiring too many freshers as you just mentioned over the past 2, 3 quarters and this will probably correct it -- correct over a course of time?

[Manoj Bhat, Deputy Chief Financial Officer]

So, Vibhor, I think, at least, my view is that the significant gap, which we used to see in the past, that probably won't be there. I think we are looking at an intake every quarter. And that is, as I mentioned, quarter 1 and quarter 2, we will end up trainees into the workforce. Now coming to your other question is the delivery model fundamentally changing with Agile, I think that's been true for some time. And I think what we're trying to do, whether with our platforms or whether with [indiscernible] delivery model, we are trying to actually think and [indiscernible] imagine that we deliver. And that would mean actually that we would think of a 5-year experience resource in a very different manner, including shared capabilities, that's something which will evolve over a period of time. But the short answer is, I don't expect a large gap between utilization with and without trainees over the course of this year, although, we will induct trainees into in quarter 1 and quarter 2, yes.

[Vibhor Singhal]

And if I could just extend that question, do you think that would stand true for only for TECHM or do you think it could just be -- it could also be the industry phenomenon?

[Manoj Bhat, Deputy Chief Financial Officer]

I think different companies follow different models. And based on their own delivery methodology, so I would restrict myself to TECHM at this point, yes.

[Vibhor Singhal]

Sure, just quickly my last question is if I can squeeze in on the top 5 and top 10 accounts. So I think it's been some time that we've seen them decelerating and not really contributing to the growth and the growth primarily driven by the top 20 accounts and the ones -- I mean, the non-top 10 accounts. Do you see a change in that scenario over the next several quarters, I know the top accounts will probably be impacted by the telecom growth that we've anyways not been that great, but any commentary on that would be helpful.

[Manoj Bhat, Deputy Chief Financial Officer]

I would expect that the top 5, top 10 will also start going into this year, so if I take the full year basis, I think, we will -- we would start seeing growth, [ Ravi ]...

[Unknown Executive]

[ Ravi ], you have to be on mute.

[Unknown Executive]

Yes, I am sorry.

[Manoj Bhat, Deputy Chief Financial Officer]

So I think, that's the trend I would see for both.

[Operator]

Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to Mr. Manoj Bhat for closing comments.

[Manoj Bhat, Deputy Chief Financial Officer]

Thank you all for joining. And I know there was -- we had to close the call due to time constraints, but please feel free to reach out to Vikas and IR team for any additional queries and we'll try to answer them offline. Thank you so much for joining.

[Operator]

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