Tech Mahindra rating: Add — Enterprise segment prospects getting better

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Updated: September 16, 2019 6:51:00 AM

Tech Mahindra indicated that the broader slowdown in the auto industry reflected in weak growth numbers for the manufacturing vertical.

Tech Mahindra, Tech Mahindra rating, Enterprise segment, enterprise growth, enterprise growth prospects, revenue growth, segment revenue growthTech Mahindra is confident of growth recovery in 2HFY20.

We spoke to Jagdish Mitra, Chief Strategy Officer and Head of Growth, to get an assessment of enterprise growth prospects. Key insights from the call: (i) growth moderation in enterprise is due to slowdown in auto and lower spending in key accounts, (ii) weakness is not structural and growth can recover from Q3FY20, (iii) new initiatives and conversion of large deals in the pipeline will help growth recovery and (iv) acquisitions will continue to be a priority area.

Slowdown in auto and weak spending in large accounts led to growth moderation in enterprise Enterprise segment revenue growth has slowed down in recent quarters. Moderation in growth was due to ramp-down of projects and cancellation of a few engagements, especially in manufacturing. Loss of revenues in Pininfarina pulled down growth in Q1FY20. Growth in manufacturing vertical has been weak in the past few quarters and was a key cause of slowdown in growth. Tech Mahindra indicated that the broader slowdown in the auto industry reflected in weak growth numbers for the manufacturing vertical. Weak growth in Europe and restructuring in a few large accounts in banking, financial services and insurance (BFSI) and retail also impacted growth.

TM is confident of growth recovery in enterprise

TM is confident of growth recovery in 2HFY20. The confidence stems from a strong deal pipeline—TM indicated that the pipeline for large deals and the overall pipeline of deals are at the highest point in the past couple of years. TM has reported healthy growth in new deal wins in enterprise division. TM indicated that emphasis on growth will not impede focus on profitability although transition costs associated with large deals can drive margins down in the near term. We have detailed key building blocks for potential revival in growth.

TM is taking steps to drive growth in enterprise

TM outlined key initiatives to drive growth in the enterprise segment—(i) the company has consolidated go-to-market with verticals as opposed to diffusion with competency units and verticals earlier. Competency units are now aligned to verticals to drive client-centric sales; (ii) TM has centralised its large deal team that has led to far better qualification of deals. In addition the company has opened up new channels for deals through advisory and private equity. Overall the quantum of large deals and win rates has improved as a result; (iii) TM is shifting focus from custom work for clients to developing a portfolio of reusable solutions that can be sold across a wider client base. The company has set up an initial target of developing 25 such solutions and scaling them up to $25 mn each; and (iv) TM has hired senior resources to cross-sell telecom services to enterprise clients. TM recently won a deal for providing network services to a BFSI client which can be a template for more such deals.

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