The Brief: Can TechM ‘Scale At Speed’?

SOMETIME IN 2020, after reading Erica Ariel Fox’s best-seller, Winning From Within, Mohit Joshi met her at an event. The book, which deals with internal conflicts of leaders, had impressed him. Following their discussion, Erica suggested an exercise — write a letter from future Mohit Joshi 10-15 from now about his accomplishments to the present day Mohit Joshi. He saw himself as the CEO of a large IT services company and a couple of years later that opportunity came by. Three years down the line, in March 2023, he was appointed designated CEO of TechM, with nearly two quarters overlap with the company’s longest serving CEO, C.P. Gurnani, and took full charge in December. Having headed Infosys’ financial services and healthcare verticals, which accounted for nearly one-third revenues and where profitability was the cornerstone, Joshi is leading a TechM which is least profitable among peers with single-digit Ebitda margins (9.6% in FY24). On April 25, after FY24 results, he unveiled a turnaround plan with a three-year target of growing faster than peers. Can it work?

Growth & Profitability

TechM strategy involves a three-year turnaround plan to scale up at speed. “FY25 is the turnaround year where we will anchor the new and invest in key accounts and service lines,” Joshi says, adding that focus will be on large clients and cost optimisation. FY26 will see complete integration of portfolio companies, he adds. “In FY27, we expect to reach the optimised state. Throughout this period, we will focus on accelerating revenue growth and improving margins,” he says. With profitable growth being top priority, the company will focus on key markets of U.S., which accounts for nearly 50% business, and Europe, which is 25%. In rest of the markets, it will focus on Australia, New Zealand, Japan, Singapore and Indonesia. TechM has put in place a new structure for better service delivery.

While TechM has defined focus markets, dependence on telecom for as much as 36% of revenue makes it vulnerable. In order to reduce concentration risk, it is looking to broad-base growth by focusing on segments such as BFSI, which accounts for 16% of revenue compared to 29% at Infosys and 31% at TCS. Manufacturing brings in about 18% and retail, transport & logistics 8%. Acknowledging that BFSI is the largest market for IT services, Joshi told analysts: “I see significant opportunities for digital services, including Cloud and infrastructure, Cloud and payments infrastructure. We see an opportunity to scale up in core banking, wealth management, asset management and payments.”

TechM, like others in the industry, is adding AI to its service offerings. With nearly 50,000 of its employees skilled in AI, “we will report the percentage of clients we’ve infused with AI and Gen AI offerings. We’re also looking to use AI as a tool for internal transformation and productivity,” says Joshi.

However, the biggest challenge over last few years has been the inability to grow large accounts and get big deals. HCL Tech, for instance, saw its total contract value rise 10% to $9.7 billion in FY24, which included three clients in $100 million bucket; it had 22 clients in the category. Even Wipro, struggling with growth, added three accounts over $100 million. TechM ended FY24 with 24 accounts over $50 million. It won deals worth $1.9 billion in FY24, including two over $100 million in last quarter. The company has now launched what it calls a ‘Turbocharge Program’ to accelerate growth from top 80 accounts that will be handled by a dedicated internal strategy team. They will also get special attention from the group’s C-suite. TechM also plans to exit a few accounts and grow some with deeper engagement to expand margins.

Operational Efficiencies

While winning large and higher-margin deals will depend on several factors, including global macroeconomic and geopolitical conditions, TechM also has other levers to improve profitability. One of these is improving operational efficiency. It aims to more than double Ebit margins to 15% in three years. They were 14.2% in FY21. One of the pillars of the cost optimisation plan, Project Fortius, is increase in fresher hiring. The company also plans to reduce sub-contracting costs, which are about 14%, improve offshore mix, drive greater utilisation and enhance automation. “As we look forward to action on productivity, be it value-based pricing or sales productivity across regions, all these are specific programme channels within this project, under our chief operating officer,” says CFO Rohit Anand. TechM expects these measures to generate annual savings of $250 million.

Thrust On Synergies

For TechM, sales to sister companies in Mahindra Group have been a missed opportunity, say experts. This is clear if we see LTIMindtree, which has kept selling to L&T group companies on top of its agenda from Day 1. TechM, as part of the turnaround plan, will look to not only execute deep-tech transformation at Mahindra group companies as their go-to systems integrator and service provider, it will also use the group network to expand its client base. “So, it’s Anand Mahindra, it’s Anish Shah (group CEO & MD), all of us working together to utilise the extremely deep and rich relationships the group has built over past 75 years, the respect it has globally, and to leverage these group relationships to drive business for TechM,” says Joshi.

That is not all. Over the years, TechM has spent over $1.5 billion to buy 35-plus companies. Industry watchers have repeatedly pointed out the failure to realise full value from these acquisitions. Some of the bigger companies that TechM has invested in either fully (100%) or partly (majority share) after 2020 are DigitalOnUS, a Cloud infrastructure company, for $120 mn; Lodestone, a digital quality assurance company for $105 mn in October 2021; and, more recently CTC, a digital engineering and transformation provider serving insurance industry for $353.7 mn, its largest and also expensive at 4.3 times revenues. The turnaround plan involves integrating these into TechM’s structure and driving both front-end and back-end integration with a target of realising synergies by FY26. The market has reacted to the turnaround plan. TechM stock has risen over 12% in the last one month.

Brokerages stay cautious. “The steps are in the right direction; however, scaling up verticals within enterprise segment and changing service mix to cater to high-margin areas may be a slow and gradual process,” says an ICICI Securities note.

Prabhudhas Lilladhar’s Pritesh Thakkar, in a note on April 26, gave a ‘hold’ rating on the stock. “We believe near-term macro uncertainties will provide limited headroom for growth and margin recovery until FY25. More important, the company’s inherent weakness and seasonality of its portfolio businesses will make it even harder for the milestone to be achieved within the given timeframe” he says. Axis Securities, which has a ‘sell’ call on the stock, says from a long-term perspective, TechM appears to be addressing client-specific issues within various verticals while maintaining a robust deal pipeline. However, global macroeconomic situation and supply-side constraints are headwinds in the short term, it says.

Nomura’s April 29 report says Ebit margins for FY25 and FY26 are estimated to be around 9% and 12%, respectively, with possibility of reaching 13.2% by FY27. “We factor in the CEO’s three-year turnaround plan and lower our FY25-26F EPS by 20-29%. Operationally, TechM is at its bottom, with margin improvement in FY25F. Other cases of turnarounds (like Infosys in 2018-20) also took three years. We maintain ‘Buy’ rating with a target of ₹1,350 (22x FY26F EPS),” says the report, adding that execution of the plan remains a key risk.

In essence, TechM wants to not only grow, but also grow profitably. If one looks at the sector among its peers, barring TCS, which has managed to keep both growth and profits margins under control, others have had to make a trade-off. In the short term, with IT industry facing slower years ahead, TechM’s future hinges on how best Mohit Joshi and his team are able to execute their plans.