Tech Mahindra’s EBITDA margin eroded by 6ppt in the past eight quarters. The sharp drop can be attributed to Euro depreciation, integration of CC business and sharp spike in onsite revenue contribution.
Further, acceleration in onsite revenue has been witnessed across the industry, but the increase for Tech Mahindra has been the highest among peers. We see room for reversal in this trend, which should aid Tech Mahindra’s margins. Retain ‘outperformer’.
The onsite revenue mix for Tech Mahindra has gone up in the past few years to the highest level among peers as: acquisitions (especially LCC and SOFGEN) were predominantly onsite driven; the company expanded its presence in LatAm, Africa and other near shore centre to serve clients; offerings like Networks Services have higher onsite component versus ADM, IMS and BPO; and projects related to Digital require higher onsite component compared with legacy IT.
We have seen similar trend for other Indian IT Services companies among tier-1 (data is shared only by Infosys and Wipro among tier-1). In our view, work-related digital requires stronger onsite presence compared with legacy.
As the deal size and scope of work in Digital expand and Indian IT companies move to DevOps, we expect
onsite revenue mix to start moderating.
The onsite revenue mix for Tech Mahindra is at an all-time high among all the tier-1 industry peers. We see higher onsite revenue mix as one of the strong margin levers for Tech Mahindra.