Tech Mahindra Ltd

NSE:TECHM

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q4 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'd now hand the conference over to Mr. C.P. Thank you. And over to you, sir.

[Chander Prakash Gurnani, MD, CEO & Director]

Good evening, good morning. Welcome to Tech Mahindra FY '20 Results -- Q4 '20 Results. I hope all of you are safe and healthy. I know these are unprecedented times. Never has a world been surprised so much. And we are well aware that the situation is changing every day, and we are all well aware that many of us have adapted well to the changing situation, and your company has literally taken this war or emergency as a priority for the employees, priority for the customers, priority for making sure that we are also active and participated in the communities that we live in. Our army of 125,000 associates have adjusted to the new normal. 93% of offshore IT associates are now working from home. And my colleague, Ravi and his team are relentlessly focused not only on working from home but to make sure that employees are engaged, employees remain healthy and employees also work in a way that they pretty much follow the same discipline as they would have when they were coming to office. Our associates were allowed to use the desktops at home only after the security measures were complied with. Data privacy and remote connectivity environment was activated. And we have not only done it in a one-way communication between our cybersecurity team, but we've also collaborated with our customers, and we have ensured that we keep all business continuity plan secure and always secure. And it is a huge start. Similarly, I do want to thank the Tech Mahindra's own internal initiative called Josh. And this is more of employees getting together and creating various fun groups. And why do I bring fun groups into today's serious conference call is because we are conscious that in some parts of the world, the lockdown has been extended, and it is very, very important that we not only focus on productivity but we also focus on employee wellness, both physical as well as mental, and Josh brings in that pure fun, happy hours virtually, dancing classes virtually, cooking classes virtually meditation classes virtually. So all I'm trying to tell you is that an important element is employees, and we continue to be focused on employees and customers. Regarding your company's quarterly performance, I want to let Manoj share with you in detail. All I can say is that till February, we booked about $500 million of new contracts. March, we continued to book businesses. My teams both in U.S. and in India were very, very active, and they booked some good businesses. And in general, financial year '20 revenues, about $5.2 billion, 5.6% year-on-year constant currency basis growth for enterprise, and communications business about -- grown -- sorry, 5.6% year-on-year is for the company in CC mode, enterprise is 4.7%, comps business was 6.8% year-on-year, and we did sign a $3.7 billion worth of large deals, TCV in FY '20. It's our customers and our continued collaboration with our customers which is making a difference. I want to reemphasize we are a company with a purpose and the company -- individually, all my employees, your employees have pooled together and created a fund for COVID-19. We are engaging with the local communities in every part of the world. They're running food kitchens in U.S. They are supplying mask and PPE equipment to the warriors in hospitals or in the police force or to the volunteers. Similarly, your company has also donated INR 20 crores to the PM CARES Fund in India. And the reason I'm covering India here is because a fair large portion of my and your employees is based out of India. We have also participated in digital health systems all over the world. Some are being to do -- deal with EPA, some to deal with supply chain management, some to make sure that there is telehealth systems available. Your company has its own proprietary telehealth system. Company continues to be a responsible partner to the local governments. Our BPO teams are working on elder care. Our in-house chat bot, Entellio, is working in making sure that we are able to provide 24x7 future command services, which are AI based, which is chat based, and which is also based on predictive analytics. So we have a command and control center, which has helped all discrete and distributed work environment running smoothly. Very, very proud of the work which is being done from the command and control center. We call it the future technologies command center, but it is a showcase by itself. Global environment. I will -- I would look for some input from you. I can only say that your company is agile, your company is actively engaged in multiple sectors, multiple geographies. We are -- our HR team has done a phenomenal job of doing what is called an operating SOP for coming back to work. All the elements like social distancing, personalizing, automation, contactless, thermal imaging, all of these have been already put into action. As and when more businesses move back to the workplace, I think our solutions are needed internally as well as needed externally. So I think, again, Ritesh and his team have done a phenomenal job on virtual call centers, call centers from home. Ravi and his team has done a lot of work on ODCs, cloud adoption, and as I said, the crypto world -- the cybersecurity world. The fact is that my team, which is almost 50% in telecom and media and entertainment, has helped my customers deliver seamless service to their customers, which is you and me. I want to call out to our telecom team, thank you for practicing run, change and grow every day at -- in a new normal environment. That in these 58 days, they've constantly supported telcos around the world, they've supported media houses around the world, so that some of us can have a better life when we're working from home. So I think overall, the company has shown resilience, and we have tweaked our offerings to capture growth opportunities in new areas. And again, Jagdish and his team has done an incredible job of repurposing some of our industry solutions to adapt ourselves to the new normal. Overall, your company has focus on cash preservation, cash flow conversion, free cash flows. So it's worked well. The cost management has been aggressive. Middle and senior management have already taken significant cuts in variable pay. Subcontractor costs have come down this quarter. So there is a lot of focus on each line item. So -- and I do believe automation, new-age delivery and creating a virtual pool will help as we go towards the next phase of disruption. I am very confident, short term, medium term depending on how soon we come out of this COVID-19 situation, Tech Mahindra will continue to be a strong pillar of support to its employees and customers, and Tech Mahindra will come out stronger tomorrow and that tomorrow, it lot depends upon how various economies shape up. So thank you, again, investors and my analyst friends. We are confident that the company is in the war mode, our teams are warriors, and we will fight, and we will fight back. So Manoj, can you take over the commentary, more about the financials, our dividends and the Q4 '20 details, please?

[Manoj Bhat, Chief Financial Officer]

Thank you, C.P. So I think all of you would have seen the numbers. Just some color on the numbers. So as C.P mentioned, fairly, it was a quarter of 2 parts. The first 2 months were about business momentum, and the last month was about some of these impacts. So if I really step back and look at the sequential decline of 3.3% in constant currency, I think when we looked at it, roughly about, I would say, half of it came from what we would see as COVID impact, and this has come across predominantly 2 or 3 areas. So one is, of course, on the BPS business, I think there were some supply side constraints as well as some approvals, which needed to be taken. So those impacted the revenue. On the network side, I think we saw some customers defer this spend because it is one of the items which can be deferred pretty easily for the shorter term. So that's the thing we saw on the network side. And then, of course, our Comviva business is dependent on quarter 4 in terms of renewals as well as new sales. So I think that was also impacted. The other way to look at -- the other streams, which contributed is, of course, coming down; from Q3 to Q4, we saw a decline in the retail, which is probably about 40 to 50 bps or so and the last 100 to 120 bps, give or take, is all about the reduction in volume at a net level. And by that, I mean, in Q4, we had transition revenue coming through in AT&T. We've entered a steady state. And obviously, we have the large deal revenue coming from the other deals we signed in Q3. So the net impact of -- on volume, as we speak, would probably be about 1%. So to me, that's something which we saw happen during the quarter. I think the other thing which happened was that many of these deal wins, we would have started execution normally. And that because of the current situation, I think the execution starts have been slower than usual as of the quarter end. If I move on to the EBIT margins, there's been a decline of about 220 bps. I think included in this is, we looked at our expected credit loss modeling, which is what we do every quarter in terms of almost a statistical approach to evaluate the health of our receivables. And given the current conditions, we decided to make some changes, factoring a slightly higher risk level and -- for potential future problems, and these are not problems which exist today, right? And that's about 100 bps including the CSR. In terms of transition costs for the new deal, I think we saw some impact there. And then the COVID-related revenue and lower utilization was about 80 bps. The currency was positive, about 30 bps or so. So that broadly where the quarter moved in terms of the EBIT margins. Moving on to PAT. The reported PAT was impacted by the onetime impairment of some of our subsidiaries, the goodwill in some of our subsidiaries. This is a yearly exercise we do. And this time around, considering the environment, we decided to take a more prudent approach, and that resulted in some subsidiary goodwill impairment, which -- excluding that, PAT margin was -- PAT was about $138 million, about 11% overall. Within all this, of course, if I look at our free cash flow at about $175 million, I think it is our second highest quarter ever. So I think the focus on collections, the focus on making sure that we are streamlining our operations and our processes around this key metric is something which is continuing, although the DSO is flat because the DSO is impacted both by the revenue line going down as well as some of the currency fluctuations the way we calculate it. I think full year, $5.2 billion in revenue, constant currency growth of 5.6%, I think, I'm just summarizing here, and we have spoken every quarter about this. If I look at enterprise, I think the weak area has been manufacturing led by auto. Communication actually did well if I take the full year perspective. In terms of other key points, I think in terms of cash and cash equivalents, we had about $1.16 billion in cash. This is after declaring INR 10 dividend in the quarter. We've also declared a final dividend of INR 5 per share, making the total to be INR 15, which is compared to the INR 14 of last year. Given the volatility in the currency, our hedge algorithm, actually, that model led us to higher hedges. So our hedge book is today about $2.5 billion, up from about $1.9 billion or so quarter before. I think apart from this headcount, I think we saw a reduction of about 5,600 people, largely led by BPS. Part of it is some of the-- what I alluded to in terms of retail slowdown and so on and so forth and part of it is normal part of business. So I think that's a quick overview. I know even you have a lot of questions. So with that, I throw the floor open for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

Also wish everyone stay healthy, stay safe. So 1 question only, which I have and probably, Manoj or C.P sir could answer, is that, I am seeing a big decline in the repeat business percentage. That is quite shocking. So can you give some light on that? And secondly, why there is similar kind of fall in the quarter in both European business and U.S. business on a quarter-on-quarter basis if lockdown is partly the reason because the time spread between both of them was quite different? So just wondering that why there is a similar kind of negative impact on both. And will that negative impact peak out in April, May, June? Or you think that we're still behind?

[Manoj Bhat, Chief Financial Officer]

So on the repeat business, it's measured as a percentage. So I said 2 things in my opening commentary on the net volume. So the net volume, what is happening is the transition revenue is stated as repeat business and that has come down, as I mentioned. And what we've ramped up in the new deal is coming as new business. So that's the fundamental reason. So it's just a question of representation. I don't think you should read more than that into it. It's just how the profiling of this deal is. And your second question, Sandip, was about, is the worst behind in terms of demand cycles? Could you clarify further on that?

[Sandip Kumar Agarwal, Vice President]

My second question has 2 parts to it. One, I wanted to understand why the impact on both Europe and U.S. revenue growth on a quarter-on-quarter basis is similar in terms of decline? And secondly, yes, whether Jan, Feb, March was the worst? Or you think April, May, June probably would see some similar pain or more pain actually?

[Manoj Bhat, Chief Financial Officer]

So I think -- let me pick the second one first. I think, as I see it, clearly, and you all follow the news as much as I do. So in terms of the impact, of course, we are still assessing -- most countries are assessing where they are in this whole cycle. And in fact, the lockdown conditions are of 2 or 3 types. There is a continuing lockdown, there have been countries which came out of lockdown and went into lockdown. So to me, of course, most of the impact is still to be seen coming into quarter 1. Secondly, I think your question why U.S. and Europe, both, as I mentioned, I think the deal transition revenue in Q4 is a big reason for U.S. to be down. And Europe is down because, of course, the situation in Europe today, including the currency form, both of those have contributed to Europe.

[Operator]

The next question is from line of Sandeep Shah from CGS-CIMB.

[Sandeep Shah, Vice President]

So this question is in terms of the impact of the COVID and the revenue decline in this quarter. So if you look at, overall, there has been a couple of weeks of lockdown. In the April, May, June, that period could be much higher. And we have seen one of the worst impact on the revenue growth amongst the large-cap sizes of the industry. So do you see the 1Q could be really, again, a very big painful quarter for you in terms of the revenue ramp-up? Or do you believe there are some issues which got not addressed in Q4 may get addressed in Q1 in terms of supply side?

[Manoj Bhat, Chief Financial Officer]

I think, Sandeep, and I will request probably Ritesh and Manish and Jagdish to comment a bit on the demand environment. But you are right that the COVID impact we really saw only in March. And right now, the full month of April, we are seeing that impact, so -- while some of the supply side issues are being addressed. At this point, I think, if I look at most of our customers also, they are just about through their business continuity process and assessing the situation. To me, that's something which we will have to wait and watch and see. I think the way to look at it is, I think, the way we expect this is 1 or 2 quarters, of course, things will take time to stabilize. But as we emerge out of this, I think we will see spend coming back. And that's something which we are working towards as an objective. And maybe, Manish, you want to comment on what customers are talking about and growth short term and long term and then...

[Chander Prakash Gurnani, MD, CEO & Director]

Manoj, I need to step out for a customer call in another 4 minutes. So let me try and summarize the growth side or the margin side on a high level. Margin side, my belief is that the company has shown a resilience by reducing the subcontractor costs by looking at optimization at every level. We should be able to continue on this journey because your company's previous quarters, our subcontract costs were almost 16% of the revenue. Similarly, there are minor adjustments that we have done, which is whether it's a variable pay or changing the leave policy, we're looking at even other options of increasing the productivity. As I said, operations are being run through to a sophisticated command and control center, and we are getting into a lot more granularity. On the growth side, Jagdish will share with you some of the offerings which we pay -- during COVID offerings, some are post-COVID offerings. And in both the sides, we are working very closely with our clients to offer those during COVID offerings and the post-COVID offering. And I can only say is that there will be some headwinds. Those headwinds will be common to everybody, but your company continues to innovate, continues to leverage most and every of my acquisition and certain businesses where the expansion is likely to happen faster, for example, digital; for example, health care, we are doing a double-click or a double drilling.

[Sandeep Shah, Vice President]

Hello, hello.

[Chander Prakash Gurnani, MD, CEO & Director]

Yes, I can hear you.

[Manoj Bhat, Chief Financial Officer]

Go ahead, Sandeep.

[Sandeep Shah, Vice President]

Yes. So I think, Manoj, you were asking Manish Vyas and Jagdish to also comment. So if we can get some color on the demand, that would be helpful.

[Manoj Bhat, Chief Financial Officer]

Absolutely, Sandeep. So Sandeep, I think there is clearly -- and if you read the commentary from some of the major service providers, there is a broad pattern. And there are very specific things that you are hearing from different regions. But broadly speaking, the commitment to continue to invest in strengthening the network, expanding the network and also 5G, I don't think anybody has said that they would want to dilute that focus. There is a temporary setback to everyone and hence to us because of the lockdowns. Because that, ironically, even if it's an essential service, but because of other related restrictions that are there in almost major -- all the major countries, it is difficult to have the field force go and deploy an engineer and optimize the network. So there is a temporary issue there.But long term, people have -- almost all the major operators barring a few have confirmed. There is clearly a focus on that will happen sometime in the next few quarters from an OpEx standpoint. But as you know, your company has always been very focused and well poised with the access rights that we have in all the major operators, as we have proven last year with some of the larger deals. But it always suits us well when we can continue to build good proposals around the ops transformation, if I may. The third element is that, if anything, the new workspace is clearly shifting more towards the home and that's something which the telcos, particularly the large ones who have been incumbent, and your company has always enjoyed relationship with the large tier 1 incumbents, they are all going to be looking at that product mix and all looking at digitization and strengthening the product mix with home as the new access of growth. So a lot of discussions that we are doing are in that direction. Other element of our business, which, of course, has and will take a little short-term impact is the BPS business, the BPS business. But that's where we enjoy the great customer satisfaction levels and some marquee customers. So we believe that is going to come back. I can't exactly predict the time line, maybe Ritesh can provide a better commentary on that. But we are very clear that those are very sustained long-term successful relationships that we enjoy. So broadly speaking, these are the 3 or 4 areas that, a, we are aligned with; b, clearly, the operators are indicating that these are the areas that they will focus on the next set of opportunity. And our -- all our teams have been extremely focused in the last 40, 50 days, not just in ensuring that the networks and the systems and the operations at large continuing to work, but I'd add that we are constantly in conversations of providing more services in BPS.

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

Sandeep, this is Jagdish. So let me give you a little bit of what's going on in the enterprise world. Again, I think discretionary spending, as you would know, is obviously slowing. And we've had -- your company has had a focus on a lot more towards change in growth. So some of that has got impacted because of our focus on moving towards digital. And I'll tell you why I think we should not move away from that strategy for 2 reasons. One, I think is this is temporary. We strongly believe that with the post-COVID world, the digital impact will be even stronger for processes to change, for solutions to become more digital or physical and digital combined. And one of the things that Tech Mahindra has been able to do with its presence in tools or whether it's 45%-odd digital revenue, we feel strongly that if you have to take this slowdown a little more on the chin, we need to come back, we will come back much more stronger. Both manufacturing and retail will probably see a larger impact of this kind of change in banking, government and also the fact that we don't have too much exposure to travel, transport, logistics and oil and gas is a positive thing for us. Going forward, as C.P was also mentioning and Manish alluded to, we have reacted very quickly to our own set of digital solutions, all at the back of stuff that we've done before in cybersecurity or the remote working from home, and we think we've done it with 0.5 million people and cybersecurity have some of the strongest networks in CAD. And with banks, we should be able to build that story together very well as those become center stage right now as customers start to open up and their focus being business continuity. So that's how we see it. I think demand will be a discretionary spend. Demand will be a little low. And automation and robotics, which has been core to our BPS, which has got hit now, but I think we'll continue to drive that as that will become core as we go forward. I'll let Ritesh talk a bit about it.

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

Thanks, Jagdish. This is Ritesh. I just want to add a little bit of color commentary on the BPS business itself. So let's just take a step back. FY '20 actually was a fairly robust year. We still closed the year with close to about a 19% growth year-on-year organic and this is in spite of the impact that we had with COVID-19 in the last 2 weeks of the quarter, starting the second half of March. The one thing to bear in mind though is that some of the COVID impact that we saw primarily came on the back of customers who had not enabled work from home, and at the same time, we were locked out in terms of being prevented from working in the office itself. And at the same time, also a few customers, who for security and privacy considerations, were not necessarily willing to move ahead at that point in time. Some of those things are working themselves out as we speak right now in the current quarter. And what we are, though, seeing is to the points that Jagdish and Manish talked about is a few silver linings. One is our core value proposition, which was centered around cannibalization through extreme automation; and number two, delivering through outcomes, which we've been talking about consistently now for the last 8 to 12 quarters, continues to resonate in the marketplace. And in fact, we've seen a bunch of wins that have happened even in these difficult times with both our existing customers, and at the same time, winning a few new logos as well. But more importantly, what we have seen is the opportunity to actually take share from some of our competitors who have not necessarily been able to stand up and support customers at these times as well. So while I do think Q1 as well will be challenging just as we continue to ride through this, I do think we come out of this with our core value proposition continuing to get reinforced, the journey to digital transformation only getting accelerated. And all of those bode well for what we stand for as a company and as a business itself. So actually, in that context, I do think that this can be a catalyst going forward as we get into recovery mode itself.

[Sandeep Shah, Vice President]

This is helpful. Just a couple of more questions, follow-up on the margins. Manoj, just wanted to understand because there maybe Q1 will see an impact also through pricing rather than just on volumes, which may further impact the utilization. So how do we model the margins directionally because we are already at 10%. So -- and there has to be some tailwinds as well. But how well prepared and required more aggression in terms of managing margin from 10% or 11% if we adjust the 100 bps of nonrecurring expense entering into Q1? And second question on the goodwill write-off. If I'm not wrong, this is for the BIO, that looks slightly surprising, while we have many other painful subsidiaries. So is it fair to say that there could be more impairment may be coming in some of the other painful subsidiaries going forward?

[Manoj Bhat, Chief Financial Officer]

So let me speak to the second question first. So we did an assessment of all the subsidiaries. And the reason BIO came up is because, of course, I think a lot of the newer contracts, I think, we are going into an integrated model, which is signed by TechM. So if I look at an entity per se, I think that is where the revenue streams were impacted, and that is where we did an assessment and some of the existing contracts of BIO were ramping down. So I think combination of those 2 reasons. We took up conservative call that we will take that write-off. So it is a bit surprising, and I can understand the surprise, but this is the reason for that. On the other subsidiaries, I think most of our worst-hit subsidiaries, I think, are already consolidated. And whatever entries we have taken, we have taken some in the stand-alone books. So at a consolidated level, we're not seeing the impact. In the stand-alone, we've seen about a INR 540 crore impact. So Sandeep, what I'm saying is we have done a comprehensive assessment of all our investments and subsidiaries and taken a call based on that. So I think, which has been stress tested, particularly in the situation that what are the downside scenarios also including COVID. So I think that's where I'm reasonably confident that, that is a situation which, in my mind, is almost like a onetime or an exceptional kind of charge. Now the second point is on overall margins. I think if I look at overall margins, the one factor, at least in the short term, is going to be about revenue growth because, ultimately, all margins need a certain pace of revenue to work upon. But having said that, I think if I look at our programs and you have seen some of the evidence already, a 3% decline in subcontractors from Q3 to Q4. And we had mentioned this in the Q3 call. The second is, of course -- so there is going to be an increased focus on, I would call, all third-party costs, number one. Number two is in terms of making sure that the entire command-control module, which we are designing in our new-age development IPs, which we had showcased even in the analyst meet, I think we are working in a model out, which combines work from home as well as work from premise and trying to do an integrated dashboard. And using that, we are trying to see what costs we can save. And of course, we are at the initial stages of some of that. The third area where I see is, of course, as we see some of these things happening, travel, which is about 2% to 3% of our costs, I think we will see savings coming through from that overall. The fourth area we are looking at is, of course, rationalization of some of our facilities and so on and so forth. And included in that is, of course, a tighter enmeshing and tighter synergy with a lot of our subsidiaries and so on and so forth, including some of the portfolio companies. The fifth area I would highlight is what C.P talked about in terms of some of the measures around variable pay bonuses, et cetera, which we have already taken that. So I think there's a whole list and a whole program of cost management and -- both proactive in terms of anticipating some of the changes. But as I said, I think the revenue situation is something which is evolving. As soon as we get a baseline on revenue, which I'm assuming is a matter of now a month or 2, I think we should be in a better position to plan accurately. We are quite confident that over the longer period of time, we should be able to mitigate many of the challenges. I think the last question you asked about pricing, and I think this might be a common question. So I'm going to answer that also. I think if I look at pricing, I think the question here is, of course, many of our customers are going through a challenging time. And also, like most -- like we are doing analysis of our costs, many of our customers are also doing that. I think the question is that from a win-win perspective, I see this as an opportunity to consolidate. I see this as an opportunity to actually convey because with this situation of work from home, many notions around what work should be there, done where, can it be done remote. So I see some of those also evolving. So -- but in the short term, of course, we have decided that we will work with our customers and figure out a win-win solution for both them and for us.

[Operator]

The next question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

Just a follow up to the telecom question here. I think, typically, we do see a fair amount of seasonal strength for telecom in this quarter, and that's followed by weakness in Q1. Given these extraordinary circumstances, how do you expect that Q1 to be? I think you did talk about Comviva, in particular, having some pushouts. So should we then expect the seasonality to slightly vary? Or do you still expect the negative seasonality that you normally see in Q1 to come in?

[Manoj Bhat, Chief Financial Officer]

I think seasonality will come in Comviva. The extent of the seasonality, of course, will be lower because, obviously, Q4 has not been a very strong quarter for Comviva. I think -- and broadly, I think, as I said, initially also that if I look at our network and BPS business, I think we are seeing some impact continuing into Q1 also. And this is also on the communication side. So does that answer your question, Diviya?

[Diviya Nagarajan, Executive Director and Research Analyst]

Yes. Yes. And I think on the EBIT margin side, I think, I know the circumstances have changed, but the original plan was to kind of get to like a mid-teens kind of margin by the end of the year. Given the setback that we've had in this quarter, what kind of a time frame do we then should be looking at for that kind of a reversal back to where the original target was?

[Manoj Bhat, Chief Financial Officer]

I'm guessing, and I don't want to say anything which is probably not very scientific, but as a goal, right, maybe we push it out by a year is what we are thinking. But again, as I said, our first job and our first reaction right now is to make sure that, obviously, business continuity was the first one, second one was around what are the emergency measures which we have taken in terms of some of the cost side initiatives. And as things start becoming more visible and clearer, which I said maybe a month or 2, I think we will start looking at more longer-range planning. But gut feel number which I'm trying to give you probably gets pushed out by a year.

[Diviya Nagarajan, Executive Director and Research Analyst]

Okay. And sorry if I missed it earlier, but do you -- have you shared a number on the percentage of your workforce that is enabled to work from home and then work from home for your IT and BPO businesses?

[Manoj Bhat, Chief Financial Officer]

About 93% offshore, almost close to 100% offshore, I mean, on-site in terms of IT. On BPS, I think on the international side, we'll probably keep closer to 70%. On the domestic side, it's probably lower right now. But those numbers are moving almost on an everyday basis. I don't know if, Ritesh, you want to add any additional color in terms of work from home and what we are doing there, specifically for BPS.

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

Yes. So Diviya, thanks for the question. I think some of the numbers of the work from home side continue to move up dynamically. It's a function of 2 things. We've had a couple of customers in particular who had not signed off on -- from an approval standpoint from their own internal processing standpoint. Some of those have come through in the last 2 to 3 weeks. As that has happened, the enablement is underway as we speak. And so these numbers will continue to just trend upwards as these approvals continue to happen itself. So as we speak right now, we are at close to about 75%. So even from the -- what number Manoj said, it's pretty much dynamic on a day-to-day basis.

[Diviya Nagarajan, Executive Director and Research Analyst]

Got it. And what do you think the peak number can be versus the 93% for IT services? What do you think the peak number could be for BPS?

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

I don't want to hazard a guess, but I would imagine we should be able to take it off by another 10-odd percentage points somewhere in the 85% and to thereabouts.

[Operator]

The next question is from the line of Mukul Garg from Haitong Securities.

[Mukul Garg, Research Analyst]

The first one was for Manish. Manish, if you look at the telecom business this quarter, there was almost a $50 million decline. It was suggested there was a meaningful non-AT&T, non-Comviva portion where compression happened. Can you clarify how much was the BPS or client specific, which can come back fast maybe in Q1 itself? And the reason why I'm asking this question is, if you look at the overall environment from your peers, there is a high level of optimism on the telecom business in this environment given the data uptick which we are seeing. And that stands out quite starkly versus your performance.

[Manish Vyas]

So Mukul, thanks for the -- so Manoj, do you want to specify something?

[Manoj Bhat, Chief Financial Officer]

Yes. So I think, Manish, maybe you can answer the question. But because we are not going to look quarter-on-quarter reasons really, but I think maybe the color can be given in terms of service lines and how we see them behaving relatively.

[Manish Vyas]

Right. So Mukul, again, thank you for the question. So I do also, from a midterm to long-term standpoint, do share the optimism of the industry because it's very clear that connectivity and connectedness is going to be the lifeline of the new normal and new economy. And both systems as well as the networks will continue to stay highly invested in, and there is nothing that I see as a surprise in any of that. I think while I can't give you specifics from a client-specific standpoint, but broadly speaking, it's really happening both because of the COVID-infused restrictions and our ability to solve from a short-term standpoint, that got negatively impacted in both the -- and will be negatively impacted maybe for at least another few months this quarter, as Ritesh said, both in the BPS business and also in the network business. Which -- the network business, of course, sounds a little paradoxical at the outset, but it is obviously a -- it's all about the devil is in the detail, which is -- which I just want to expand on that a bit because it is about supporting the networks on the field, particularly in markets as far ranging as Latin America to European to some of the Middle Eastern countries, where the -- and almost 60% to 70% of the workforce was asked to stay home, very, very early in some of these markets even before what we saw in some of the other markets. So there was -- though there -- and that put enormous pressure on the networks to be able to support. Thankfully, the networks we have built and have been built in a resilient fashion, so things continued, but not without episodes. So that was the primary reason why you saw -- and of course, in Q3, we did have some significant -- since you are comparing quarter-on-quarter, there were some significant wins that did help us. So I think from a midterm to long term, like I said earlier to Sandeep's question, we believe that the broad growth pattern will continue around us scaling back, regaining back whatever we will lose in the short term in both the BPS as well as the network business. While we continue to strengthen, in fact, early last -- early this quarter, we are almost in the final stages of another important deal in the BPO space. So we will continue to focus on these 2. And as far as our core IT digital business is concerned, we are actually seeing a greater demand. Of course, there is a timing issue because by the time the supply chain will continue and complete the contracting, and we will start delivering those, it may be -- there may be a lag of about a quarter or more. But there is an increased velocity, and that is where the optimism, I think, is absolutely well placed.

[Mukul Garg, Research Analyst]

Got it. And 2 quick ones for Manoj. Manoj, you pointed out the impact of COVID in Q4 top line. How much of a supply-side issue impact can be there in Q1 or do you have any sense on that number? And second one, given there's a lot of commentary from your peers about cost takeout opportunities at clients through acquisition of captives? What is your thought process on that? Is that an option which you guys will also be exploring?

[Manoj Bhat, Chief Financial Officer]

Right. On COVID, I think if I look at quarter 4, I did give you an impact of about 150, 160 bps. Half of it was demand-led and half of it was supply-led. I think going into Q1, I think, the supply side constraint has gone down quite a bit. I think it will be more demand-led. Unfortunately, I don't have a number for you because we are dealing with multiple variables here. But I think just in terms of the nature, and you saw Ritesh also say that as every week almost, we are seeing some uptick in terms of our ability to serve customers and customer approvals. So I think on the second one, of course, in terms of strategy around captives, et cetera, that's something which I think is not a new one. In fact, we have done at least 1 large deal in that space a few years back. But I think it all depends on which vertical and which captive. And some of these discussions are, I think, a bit premature and early-stage to comment upon. As we get -- see more indications of traction on it, we will specifically comment. But at this point, I think we are looking at a few, but that's, as I said, very, very early stages.

[Operator]

The next question is from the line of Sumeet Jain from Goldman Sachs.

[Sumeet Jain, Equity Analyst]

My first question is for Manish Vyas on the communication vertical side. I guess, clearly, if we look at the decline what you have in Q-o-Q, one is on the BPS network side around the supply side constraints and then the AT&T ramp down. So I think clearly, these are quite reasonable, but wanted to understand, since you said that in mid to longer term, you see growth reviving back. So do you see a U-shape or a V-shape recovery kind of a nature? And in the medium- to long-term growth, what kind of normalized growth one should see in the communication vertical given that work from home and those tools will be more in demand going forward?

[Manish Vyas]

Sumeet, I can assure you only one thing, there will be some shape to the growth. I just can't predict what exactly will the shape look like. But that's on a lighter note. I think we still are playing with a lot of uncertainties, not in terms of where the growth opportunities are, but what kind of -- because while there will be a lot of intense activity in telecom, that is absolutely a given. That I can assure you, that I can confirm to you, and I can also confirm to you that your team, your company is going to be very busy in winning and supporting and delivering those projects that will come based on the trends that I had alluded to earlier: digital, network, customer experience, cloud and so on and so forth. I think the uncertainty is coming largely because there is an impact on the telecom company's customer base, right? So the prediction is that probably there will be a large erosion in revenue from the SMB market, in -- particularly in places like U.S. and also Europe. There will be a shift in terms of the traffic towards more the new workplace, which is home. Some of the larger customers have -- our customers have very large enterprise customers. Depending on what those industry segments are, which countries, whether it is manufacturing or others, there will be an impact on that in the short term. And then finally, from a consumer spending standpoint, I guess we'll have to see what impact it has on the mobility and wireless side businesses. So there is a little dependency. Now not -- I don't think anybody can claim to have answers to all these questions. And that is the only reason why we are giving you these answers, which are a little bit more in the approximate terms rather than absolute. But I'm pretty clear in terms of where the hot buttons are that we are already pressing. I think we have not had one dull moment in spite of the lockdowns or the crisis. I hope that helps you. I know there are restrictions to what I may be able to share more because in some cases, even we don't know. But clearly, around network, BPS, customer experience overall, digital, within digital, the cloud, and of course, AI are the areas that we are very busy right now.

[Sumeet Jain, Equity Analyst]

Right. Got it, Manish. But can you just briefly comment how is your order book panning out in the communication vertical in the last 1, 1.5 months since COVID impacted? So that's one side. And secondly, are you seeing any pricing challenges in the communication vertical where we have a pretty good strength in terms of capabilities?

[Manish Vyas]

Yes. So I think the order book, I don't have the number readily, but there is -- if your question is that are we seeing decisions from the customers? The answer is yes. We have continued to see for some of the mission-critical projects, lot of decisions that have happened. And yet, there are some decisions that are getting pushed just because people are not available at this point for this activity, but that will happen in due course. As far as, the second question was about -- can you repeat that?

[Sumeet Jain, Equity Analyst]

Yes, sure. I asked about the -- any pricing pressure you are seeing in the telecom?

[Manish Vyas]

Yes, absolutely. So I think there is -- at this point, there is nothing untoward that I can report. However, again, this is a broad prediction that there, as the numbers for their own business become clearer to them, there could be some conversations that will happen. It may not be related to pricing, but could be related to what else we can do for each of our existing customers. So, so far, I think these are early days yet. But that said, I think I have always said that telecom, we've always had a pretty competitive landscape. And given that we operate in 4 or 5 different service lines, we are talking about different types of competitive pressures as well. So it's always a dynamic field. So I wouldn't give any comfort saying the pricing pressures won't be there. They will continue. That's the sign of time, and our answer to that is not necessarily eroding margin, it is about doing more for less, which we will -- we are very committed to. But we have to ensure that we continue to scale and grow from where we are currently.

[Sumeet Jain, Equity Analyst]

Got it. Got it. And my one last question for Manoj in terms of provisioning for the doubtful debt. So how do you see things panning out in the first month of this quarter? Will we see further such kind of things coming up in June quarter?

[Manoj Bhat, Chief Financial Officer]

So our experience, and of course, we took the decision to do something about this, let's say, about 45 days back. To my mind, of course, in some of the smaller marginal customers, we are seeing some weakness. From my perspective, just with the data points today, I would imagine that this is an adequate kind of provisioning. But Sumeet, I really -- it's like gazing into the crystal ball. But I'm just giving an experience of 45 days since we have decided to do this, right? As of now, that's what it looks like.

[Operator]

We'll take that as the last question. I would now like to hand the conference back to Mr. Manoj Bhat for closing comments.

[Manoj Bhat, Chief Financial Officer]

Thank you, everyone, for joining the call. And I know maybe some of you did not get a chance. So Kaustubh and me both are available for any queries. So please do feel free to get in touch with us, and we'll be happy to clarify anything which is unanswered. So thank you all.

[Operator]

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