Tech Mahindra

Tech Mahindra aims at building a sustainable competitive advantage for their clients, it represents the
connected world, offering innovative and customer centric services. It helps its clients to transform
businesses to a more integrated and connected one. TechM has innovative platforms across a number
of technologies to deliver tangible business value to its customers. Tech Mahindra is the highest ranked
non-US company in the Forbes Global Digital 100 list (2018), and also featured in the Forbes Fab 50
companies in Asia (2018)

TechM has also adopted 5P framework (performance, pipeline, partnering, percentage wallet share and
productivity of scale) to kick start growth of Enterprise division.

TechM’s 3-4-3 strategy:

“3” Mega Trends “4” Big Bets “3” Objectives

Explosion of connected devices Integrated digital customer Run Better
experience
Power of new technologies Change Faster
Connected through IoT
Exponentiality of content Grow Greater
consumption Software transformation

Networks of the Future

According to Cisco’s estimation, in 2003 there were 0.8 devices per person globally, while in 2030 there
will be around 67 devices per person, thanks to IoT. IoT applications aggregate, analyze and deliver
insights to drive more informed decisions and actions. TechM consider that IoT as a great opportunity
and is investing in IPs, platforms, frameworks and innovation labs to enhance its capabilities. It has built
Factory of the Future lab and AR/VR labs in India.

Consolidated revenue by vertical (in %)

Expense division (in%)
Vertical FY19 FY18
Communications 41.2 43.3 Particulars FY19 FY18
Manufacturing 20.2 19.2 Personnel cost 37.1 39.6
Technology, media and subcontracting expenses 44.5 44
entertainment 7.2 6.5 operating and other expenses 15.3 12.9
BFSI 13.4 13.7
depreciation 2.9 3.2
Retail 6.4 6.8
Others 11.6 10.5 finance cost 0.2 0.3

Biggest share of the expenses is going to employee benefits + subcontracting activities which is again in
a way is employee cost (it is 82% of total expenses and 65% of total revenue) considering standalone
statement, while 74% and 64% in the consolidated statement

Subcontracting expenses is divided in two ways there are resource based subcontracts and there are
task based subcontract. Also, there are in most of the cases the subcontracts are turnkey contracts,
which is predominantly resource based subcontract and that is increasing
 Tech Mahindra
MOAT:

Have command over Telecom sector, creating its niche in the market. TechM works in the space of
software development and maintenance and infrastructure management but it has an added advantage
that while other IT giant works in infrastructure support for clients mainly in enterprise (manufacturing,
BFSI, retail and healthcare), TechM works majorly for telecom (about 42% of the revenue came from
here). Also, the company is focused on growing inorganically, thus keeping itself abreast with digital
technologies through M&A catering to all the niche segment of market requirement. With 5G rollout
round the corner, it has great potential to grow and bring returns. The company is regularly investing in
capacity building through subsidiary and associate, currently it has about 140+ subsidiary and 7 odd
associate.

Particulars FY19 FY18

Revenue 347421 307729
EBITDA margin (%) 18.20 15.30
ROCE (%) 22.8 21.7
EPS 48.47 43.02
ROE (%) 21.9 21.5
EV/EBITDA 9.9 11.4
P/E 16.0 19.5 (industry average)

Strength and Opportunities:

5G rollout to be a bigger opportunities:

 As IoT market continue to explode, mobile network operators are facing increased competitions
and challenges to meet end user requirement that are secure and have adequate network
capabilities
 5G rollout throughout the world is imminent which can be seen in China, South Korea, which
already has started operating on 5G which attracted 1 million subscribers in one month
 Telecom constitutes about 41% of the revenue and is the core capabilities of the company and
there is huge demand lying in front of them

Inorganic growth opportunities:

 TechMNxt the flagship automation and digital initiative by the company is again giving great
impetus to the growth potential through inorganic growth
 In past 5 years, TechM has spent approximately $750 Mn on 13 acquisitions
 They are looking for filling up the gaps in their offerings and align them into their growth
strategy
 The company envisage itself to be the digitally capable and innovative company which it looks to
achieve through both organic as well as inorganic means by building capabilities through small
acquisitions
 It has built partnerships with Intel, Pininfirina, Rakuten and Altiostar in telecom domain, that
gives it the upper edge in its digital capabilities
 Tech Mahindra
 It is also looking for opportunities in in-house software for the upcoming technological advances
such as application development and management for connected cars, automated shop floors
and built in IoT services
 TechM acquired US based Mad-Pow Media Solution which mainly has digital solution expertise,
it’s acquisition will help TechM to enhance its capabilities in Data Science, Strategy and Service
design. It will also help to enhance verticals like Healthcare, Media and BFSI

Investment in R&D:

 TechM has recently announced the launch of its netOps.ai framework that drives network
automation and managed services
 This framework can automate all key network lifecycle stages which can significantly boost the
rollout of 5G
 5G and industrial IoT is going to be the future and the company is putting its footprints in both
ends
 The company is working significantly on Blockchain and its investment in blockchain is showing
result in the form of “Blockchain Ecosystem” that has been created
 Digital is being focused and this recent quarter Q1’20 there is 36% revenue from digital and has
shown growth of more than 25%
 The expenditure incurred on the R&D for the future digital technologies is ₹ 311 million

Risks and Threats:

1. Political headwinds: Major business comes from telecom, and thus rollout of 5G is important, but
now, the recent restrictions on Huawei and ZTE both in terms of market access and supply chain
could impact 5G rollout worldwide
2. Synergy cost: Although there is a upbeat mood regarding the inorganic strategy, but this strategy is
prone to integration risk and failure to realize the synergies, like it happened in LCC
3. High attrition, with high subcontracting cost and additional investment required to reskill employees
would drag margin improvement
4. Visa related cost and uncertainty with respect to US, as 47% of the business is procured through US,
but it is still stead better than its peers
5. Unfavorable currency movement, rupee appreciation that can drag the margins and could end up
hurting the already damped offshore-onshore ratio in revenue
6. Structural changes: Pininfirina which is the growth driver for last two years, is expected to shrink to
about 10% due to suspension of auto deals amid global weakness which will hurt its fragile
enterprise business

Final Verdict:

While, company reported weak performance recently in its key business verticals due to the structural
nature of telecom and weak demand in enterprise segment, but the growth could pick up aided by
strong deal win pipeline, strong revolution in telecom sector which is expected with the rollout of 5G for
which the company is better positioned with respect to its peers with its end to end capabilities in
Telecom and healthy demand coming from Digital Solutions segment for which it has great capabilities
through its subsidiaries.