Gurnani says he feels encouraged because the overall deal pipeline is very strong. “All the changes were earlier in my planning. I used to take a forecast date plus minus one quarter. I think because of certain uncertainties in the market or certain sectorial uncertainties, now it is plus minus two quarters.”
You have said that this has been one of the most challenging quarters. Is this actually the worst or is the pain going to continue for a couple of more quarters?
CP Gurnani: I strongly believe that we have an opportunity to improve from where we are. That opportunity to improve comes from four facts; number one is our people investments; number two, technology investments. Number three, deep relationship with the customers, and number four is that our investments in communications and in AI will create better solutions for the market. It is a situation where some of our verticals are slowing down because they need to repurpose themselves. It is not that they are going to slow down forever. That is why I remain optimistic. And I am very sure that we will see a recovery.
Mohit, this is our first conversation with you as the CEO designate. What are going to be the key priorities for Tech Mahindra because you have toured India and the globe extensively over the last few weeks. What have client conversations really been like?
Mohit Joshi: It is slightly over a month since I joined. I have spent most of the time trying to get up to speed, to listen, to learn and to meet with the teams and to meet with the clients. The first set of pit stops were in India, visiting our largest centres, doing town halls, getting a sense of the culture of the organisation. After that, I have been in Europe and the US meeting with a number of our largest clients. And a couple of things have struck me.
The first is that this is a very strong company and even more so after being inside that, the strengths of the relationships with the employees and the strength of the relationship with the clients is really quite profound. I was very heartened to see the strength of the company in action.
The second thing is that we run a very attractive industry. The service lines really have seen a high level of thought leadership. I am quite comfortable that our service lines are world beating. And thirdly, this has been a challenging quarter. But in the medium to long run, I am very confident of the capabilities of the company, the strength of the relationships. Clearly there is work to do. CP and I, over the next five to six months of the transition, are going to be working on a plan and we will execute on the plan. Hopefully by that time, the economic environment will start to change as well.
There are very bleak margins this quarter but do you see them hitting double digit by year end?
Rohit Anand: We can talk about the levers and what is driving the current quarter margin and giving guidance. When you look at 6.8% drop for 40 bps quarter over quarter, 50 bps of that is driven by Comviva seasonality. There is a drop in revenue causing broadly a 2% margin drop. While we do reduce the cost associated, there is a mismatch there. That is the 2% and it is driven by certain one timers in the quarter based on certain client situations around bankruptcy announcements, which we have taken on a conservative basis in provisions in our books.
That is causing one time in the quarter to reduce the margin by 200 bps and that is where the drop is for the current quarter in terms of drivers. As you look forward, there is a tremendous room of opportunity on driving operating improvement on various metrics. As we have articulated in the past, we still have headroom on cost reduction which we produced from 16% of revenue to 14%. We continue to drive it even further down. We have an opportunity to improve our pyramid rationalisation. We have inducted freshers in the past. We will continue to drive that in the future, making sure we get some cost benefit on levers around offshoring and divestment that we had also mentioned of non-strategic assets.
As we get through the year, those are the actions we will execute and continue to drive improvement from where we are towards the fourth quarter.
Given that this quarter was affected by seasonality and one-time expense, is it fair to say that this is the bottom for margins?
Rohit Anand: Yes.
I like the emphatic yes, but deal wins were also muted this quarter. Do you see yourself getting back to $700 million to about $1 billion a quarter run rate anytime soon?
CP Gurnani: If I were to answer like Rohit, I would have said all of the above. But personally, I am a little encouraged because the overall deal pipeline is very strong. All the changes that I have noticed were earlier in my planning. I used to take a forecasted date of closer plus minus one quarter. I think because of certain uncertainties in the market or certain sectorial uncertainties, now it is plus minus two quarters. The value proposition of cost transformation, value proposition of technology transformation, value proposition of business transformation is very strong. Hence, I would consider this as a temporary blip in terms of large deal performance but I am overall confident that it will come back.
When do you expect a recovery? Will FY24 be a year of 2-3% flat growth or decline further?
Rohit Anand: We do not give guidance but I can tell you directionally the way we are thinking. We said it before that our first half would be challenging and that is what it is turning out to be based on the macro environment and one cue a little bit more than we anticipated. The view continues to be for us from a first half perspective and we assume right now improvement, based on certain client discussions and the quality of those discussions, that improvements will likely happen as we move into the second half. But given the volatility of the situation and the environment we are in, we have to be closely monitoring and updating all the stakeholders as we move forward between now and heading into the second quarter.