Automation and AI will drive margins, say Tech Mahindra's top brass

Tech Mahindra’s new leadership, including Chief Executive Officer C P Gurnani, Chief Financial Officer Manoj Bhat, and Chief Operating Officer L Ravichandran spoke to Romita Majumdar about the levers driving the company’s high margin growth and the opportunities in different verticals. Edited excerpts:
 
Margin performance has been above expectations (240 bps sequentially). What has worked? How does TechM plan to take it forward?
 
Manoj Bhat: About 80 basis points (bps) came from currency, 60 bps from reduced visa costs, and 140 bps from operational improvements in the business mix. We had wage hikes in this quarter for a part of the workforce, which had a small impact on the margins.

 

On a long-term basis, we're looking at automation and AI in every segment of our business, and how we can use them in a practical way across the board. Some of the automation investments will turn up in the future as margin improvements. We are also working with our portfolio companies to improve margins and revenue. The newer service lines will obviously offer better yield as the service line grows, and the margins will improve. So, we are pushing growth in digital. Thinking about how we're utilising the skills among our workforce in a shared mode adds to the margins.

 
You reported $300 million worth of deal in communications. Where is the demand coming from?
 
L Ravichandran: In the telecom sector, we have won large deals in IT-managed services and IT infrastructure, especially in the APAC region. Traditionally, the deals used to be transition driven, but now are automation driven. We're also driving transformation-based projects to make the customer more digital. Because of the automation tools, skills and expertise base we have developed in automation, we will see higher margins.
 
CP Gurnani: Telecom is capital intensive, and not every market wants to spend that kind of money. Uptil now, networks were focused on B2C, but with 5G, the focus will shift to other areas. There is a huge opportunity in modernisation of architecture, wherein telecom providers are competing with multiple players across internet services and OTT players. Something that Reliance Jio or AT&T have done. As such players transform, we will get a certain wallet share. We expect a capital spend in the spectrum market for 5G over the next few years. We are also doing two trials as it is one of our big bets.

 
Subcontracting costs have gone up over the past quarters and so has attrition (20%). Is this a side-effect of growing digital business at a high rate and a need for more digital resources? Also, offshore mix has increased slightly in this quarter compared to offshore. Is this seasonal or a long-term process?
 
CP Gurnani: There is an equation between skill development, learning and project-execution areas. Subcontracting costs will go up because there is a need for quick turnaround of projects on the local sites. Second, attrition has a direct relationship with how the business is changing. If digital revenue has gone up 10 per cent q-o-q, clearly there are people who are not into it (digital).

 
  L Ravichandran: On the offshore front. For some of the larger deals, as part of operational improvement, we are trying to discuss with the customer to move more onsite projects to offshore. It is a continuing exercise, which is adding to our growth.
 
Enterprise has witnessed degrowth. Is there a plan going forward? Especially, on the health care front?
 
CP Gurnani: Most of the health care business is from HCI. There was a decline of about $40 million (q-o-q) due to the closure of two big projects. Enterprise business minus health care grew at three per cent. But, we are firing on all verticals, despite the slowdown in health care, which will build up in the next few quarters. Enterprise portfolio is very diverse, with about 930 customers, while telecomm has about 130. Manufacturing and BFSI will remain our focus, while retail has done very well in the quarter. If a few of them are not doing well, and the others are able to pull through, we are in a happy state.