Highest sequential growth in a decade: 6.7% on QoQ basis in INR terms.
EBIT margin flat: TML (Tech Mahindra Ltd) reported EBIT margin of 15.2% in Q2 FY22. On a QoQ basis, margin remained flat but showed a 100bps increase on a YoY basis. The tailwind was operating leverage, which was offset by lower utilization (due to added headcount) and higher subcontracting costs (due to travel restrictions). TML states that with the economies opening up, travel might come back but it would not be significant, due to which elevated subcontracting costs can potentially be replaced by full-time employee costs. Offshoring is still a lever that has not been fully exploited by the company (relative to peers).
Momentum in deal wins to continue: TML reported net new deal wins of US$750mn. It hinted at a similar kind of number even in Q3 FY22.
FY22 guidance maintained on revenue and margin: TML did not indicate any specific number for revenue growth in FY22. However, it has maintained its guidance of double-digit organic revenue growth for the overall company based on strong TCV wins, a strong deal pipeline and good execution momentum. TML maintained its EBIT margin guidance at 15%+ for FY22.
Acquisitions to bolster competencies: TML has announced that it has approved the proposal to acquire 2 companies through its wholly-owned subsidiaries. Acquisition of 100% shareholding in Lodestone (headquartered in California) by Tech Mahindra (Americas) Inc has been done to bolster TML’s end-to-end digital product engineering capability across Design, Build and Test by employing Lodestone’s expertise in effective utilization of data strategy and providing end-to-end product quality assurance across hardware, software and data layers. It has more than 300 employees. For the financial year ending 31st December, 2020, it had revenue of US$43.3mn. The transaction is expected to close immediately. Acquisition of 100% shareholding in We Make Websites Ltd. (headquartered in London) by Born London Limited, UK, will add to TML’s capabilities in Experience Design pillar and help build an industry-leading Shopify practice. It has around 48 employees. In CY2020, it had revenue of 4.6mn pounds. The transaction is expected to close simultaneously with the signing of the contract.
Decrease in PAT QoQ due to higher effective tax rate: PAT was reported at Rs13.39bn, up 25.7% YoY and down 1.1% QoQ. The decline on a QoQ basis was due to higher effective tax rate of 29.3%. This was because of one-off tax charges in a subsidiary for Q2 FY22. The Effective tax rate for the full year has been guided towards a number of ~26%.
High attrition being countered with huge increase in hiring: TML reported a rise in attrition to 21% in Q2 FY22 against 17% in 1QFY22. It inducted ~15,000 employees into the company while doubling the fresher intake (though no specific numbers were shared).
Subcontractor policy: Sub-contractor expenses as a percentage of revenue increased by 40bps QoQ to 15.2% from an already high 14.8%. TML has indicated in the past that having a high subcontractor cost was a deliberate part of its strategy and it would continue to remain high even going forward. This view is quite different from the one expressed by its peers in the market. However, the company on the call did indicate that it would attempt to replace some subcontractors with its own employees to some extent and sees it as a margin lever going forward.