Corporate spending has tightened on all counts: Vineet Nayyar

Interview with Executive vice-chairman, Tech Mahindra

Weak profitability impacted Tech Mahindra’s March 2015 quarter results. A full integration of low-margin acquisitions, adverse cross currency and wage hikes impacted profits. In conversation with Sheetal Agarwal, Tech Mahindra Executive Vice-Chairman Vineet Nayyar indicated that demand trends are weak in energy and margin improvement may take some time. Edited excerpts:

Tech Mahindra’s Ebitda margin fell sharply in the quarter. What are the key contributors to this?

The Ebitda margin was hit by a number of factors. Wage hikes impacted 190 basis points, while cross currency had a 100 basis points impact. Also, the margins of LCC acquisition are lower than the rest of the company and led to a 150 basis points fall in margins.

Drop in utilisation rate and higher selling and general expenses as a percent of sales also impacted margins in the quarter. We typically recover margins lost on account of wage hikes over the next 2-3 quarters. While no-one knows what happens with the currency, we expect LCC margins to improve over a period of time. Utilisation a lever we plan to pursue very hard. Barring acquisitions, we operated at 76-78 per cent in utilisation which is upside of 4-6 per cent from current levels. Our endeavour is to regain those levels, though the timing is uncertain.

How are client budgets shaping up?

Corporate spending has tightened on all counts. Deals linked to risk reward, outcome based and asset carve out will be more prominent in FY16 as compared to FY15. Automotive and Health and life sciences look good, manufacturing is slow. We see a positive outlook in Travel, Logistics and Railroads.

Do you believe FY16 will be a better year compared to FY15?

We do not give any guidance. However, in certain areas we see a positive growth in the year to come. The energy segment will be low until we see stability in oil prices. As I mentioned earlier, we see a negative sentiment on account of geo political issues, hit in commodity prices, Corporates are flush with cash but not spending.

Demand trends witnessed across key markets in the quarter? Which geographies will drive growth going forward?

We see a huge potential in the European region. However, one factor which is very difficult to forecast and has a huge dependency on growth of our kind of business is - currency in emerging markets hence this could be a variable which could move upward or downward. We are finding customers investing in Digital Transformation initiatives. Also our pipeline for bigger & large deals is looking healthier.

Throw some light on large deals in the enterprise and telecom businesses.

Deal activity is higher than compared to last year — conversion is key.

How is the network deal shaping up both on revenues as well as margin fronts?

Network spend is poised and we are gearing up to tap the synergies with Tech Mahindra and Light Bridge Communications by offering End to end vendor neutral network SI service. Operationally, we are performing in line with our contractual obligations and have been running this stably since the acquisition.