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Edited Transcript of TECHM.NSE earnings conference call or presentation 30-Jul-19 1:00pm GMT

Q1 2020 Tech Mahindra Ltd Earnings Call

Mumbai Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Tech Mahindra Ltd earnings conference call or presentation Tuesday, July 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chander Prakash Gurnani

Tech Mahindra Limited - MD, CEO & Director

* Manish Vyas

Tech Mahindra Limited - President of Communications, Media & Entertainment Business & CEO of Network Services

* Manoj Bhat

Tech Mahindra Limited - CFO

* Vivek Satish Agarwal

Tech Mahindra Limited - Global Head for Enterprise Verticals Solutions & Portfolio Companies

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Conference Call Participants

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* Ashwin Mehta

IDFC Securities Limited, Research Division - Director

* Diviya Nagarajan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Mohit Khanna

Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pankaj Kapoor

JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst

* Sandeep Shah

CIMB Research - VP

* Sandip Kumar Agarwal

Edelweiss Securities Ltd., Research Division - VP

* Sumeet Jain

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Surendra Goyal

Citigroup Inc, Research Division - Head of India Equity Research, Director and Senior Analyst

* Viju K. George

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Tech Mahindra Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. C. P. Gurnani, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

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Chander Prakash Gurnani, Tech Mahindra Limited - MD, CEO & Director [2]

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Good evening. Good morning. Welcome to Tech Mahindra Quarter 1 results. Quarter 1 is marked with strong deal win momentum, much better than what we had witnessed last year. Overall, the pipeline is robust and much bigger. We always classify the business that we do as run, change and grow. The change, which is really the digital business, continues to grow and is showing very, very good results. Overall, we are confident of delivering higher growth for the company. A few highlights for the quarter, revenue at $1,247 million. It is 1.6% quarter-on-quarter degrowth.

Our communication business recorded a degrowth of 3.2% quarter-on-quarter. The softness is largely due to the seasonability -- seasonality in our mobility business. Excluding the seasonality, communication business is flat in constant currency basis. They have had a good, strong growth over the last 3 quarters, and the deal pipeline looks very robust, so I would only take the softness as a predictable softness in quarter 1.

Enterprise business recorded a marginal decline this quarter. Some of the sluggishness in our business is owing to auto and BFSI customers. Health care has shown a very sharp rebound. High-tech continues to show good growth momentum.

EBITDA for the quarter was at $190 million. Profit after tax for the quarter is about 11.1% of the revenue. I know Manoj will help all of us understand more about where the EBITDA is and what is the impact quarter-on-quarter. I'm very happy to report that digital revenue continues to grow strongly, and it is now 36% of the quarter 1 revenue, 3.9% quarter-on-quarter growth.

Digital will continue to be a major foundation stone of growth, and we are getting a fairly good pipeline on -- regarding digital transformation, and our participation with our customers.

Today, your company also announced acquisition of a digital company called Mad*Pow based in U.S. It is 70 people strong, a very, very nice boutique with a capability in customer experience, human-centered design and understanding of behavioral science, which will give Tech Mahindra a significant edge in digital transformation projects that we are executing, and we will also benefit with the Mad*Pow's own footprint. I'll let Vivek Agarwal take us through the Mad*Pow acquisition when I invite him for further conversations.

A great quarter in terms of deal wins, $475 million in quarter 1. Deal wins in enterprise are highest in the recent past. Large deals across verticals in BFSI, health care, manufacturing. Pipeline is at all-time high this quarter across Communications and Enterprise business. Some of the large deals, we are now in final stages of negotiation. They are meaningful and they will help us meet higher growth trajectory in the -- for the next 3 quarters. We've also seen good traction in 5G pipeline. We've also seen network services being cross-sold into enterprise customers for one of the large deals in the $475 million is actually a banking financial services customer, but we have sold network transformation. So clearly, the communication sector is -- network is becoming fast horizontal, and it will even become bigger horizontal as we go -- as the world starts adopting 5G.

I mean I was internally joking with our CPO, Harsh Soin, that my best employee is actually a humanoid called K2. I mean this is our latest induction as we try and internally adopt to the digital transformation. Our humanoid K2 is taking over routine HR transactions, helping us create a better employee experience. K2 is a good example of artificial intelligence technology, machine learning and, in a lot of ways, helping us improve our customer scores and helping us improve our internal employee scores.

Our HR has also implemented AI-based facial recognition system, and your company continues to adopt the TechMNxt charter. We are collaborating with ecosystem of next-generation partners, new-age industry solutions working with various partners across the world. We also announced our collaboration with Mitsui to target SAP, S/4HANA transformation in the Japanese market.

Overall, a soft quarter for numbers, but the deal win momentum gives us the confidence that the demand environment is stable for us. We do believe that it will give us a decent start in Q2. We are optimistic about our growth potential in Communications business. We've analyzed the deal wins. We have analyzed the overall deal pipeline and Communications business has a slight edge in deal pipeline when we compare it with the Enterprise business. Enterprise business, health care is showing a good track record. And overall, I can only say is that there has been some headwinds, whether it is owing to currency, transition costs from the large deals or the wage hikes that we have given. But we will try and recover some of the higher costs through our focus on automation, New Age Delivery, yield management and synergies across the year. BPS continues to grow. Retail share provided great deal momentum. We continue to add employees in the BPS. We continue to expand our global footprint in BPS. And I would now like to invite Manoj Bhat, our CFO, to share the financials of Q1.

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Manoj Bhat, Tech Mahindra Limited - CFO [3]

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Thank you, C. P. I think while C. P. covered at a broad level, I think, first, if I look at the growth on a constant currency basis, I think the point to note is that, if I exclude Comviva, I think comms is flat and Enterprise is about flat. So I think in that sense, the currency impact has been about 0.6% or so. So in terms of the EBITDA margins, I think -- and probably we should look at EBIT because obviously we have also adopted Ind AS 116 during the quarter. And there is interchange of some of the expenses between depreciation and rental lease expense. So at the EBIT level, I think if I look at it, the lower margins largely is because of the portfolio companies. I think there has been an impact of more than 100 basis points in portfolio companies. The salary hikes is about a 100 basis point impact.

If I look at lower revenue, I think -- but we have continued to invest in manpower, and that's across both IT and BPO. I think the utilization has dipped a bit, that's the impact of about 60-odd basis points.

H1B Visa is lower. So it's about 40, 45 basis points impact. Currency is about 40 basis points. And deal transition and some of the expenses we are incurring will be about 20 to 30 basis points.

So to me, I think this is a broad view of the margins. And if I go through each one of these, I think, some of the seasonality in our mobility business will be covered and recouped back through the year. Salary hikes of -- which is about 100 basis points, we will recover it over the quarters ahead in terms of initiatives around New Age Delivery, automation, productivity. Utilization, I think, that will correct itself as revenue growth comes back in, which we expect to start from quarter 2.

Visa cost is onetime and currency is an unknown. But obviously, we follow a hedging policy which does ensure some protection at the PAT level.

I think the other side of the story is the cash flow. I think the cash flow from operations for the quarter was about $160 million, which is about 61% of EBITDA, which is a drop because one of the things which has happened during the quarter is, if I look at our DSO, it's gone up overall by about 8 days, but most of it is unbilled revenue. And that unbilled revenue, I think, will translate back into billed and then will be collected. So I think we should -- we are seeing that impact in this quarter, but it'll correct over a period of time, which is even the same thing that happened last year.

So going below that, I think, cash and cash equivalents was about $1.2 billion as of 30 June. The dividend of about $220 million, $230 million will be paid out in quarter 2. So that is something which will go away from this number. I think we spent about close to $300 million -- or sorry, $270 million on our buyback, which was concluded on 15th April 2019. I think what I would like to do is reiterate 2 or 3 things. So while there are multiple headwinds on margins, I think we will be on a recovery journey as we go forward.

What is very positive is, I think, we have had, probably in terms of our funnel and in terms of late-stage deals, I think we have had one of our strongest periods ever, and that's something which bodes well for us in terms of the future. And we remain that confident that with some of the revenue growth coming back, I think we should be able to look at some of the view on communication growth being higher, much higher than last year. And enterprise growth to what we had told you last time that it will be in and around the mid-single-digit growth.

So with that, I will throw the floor open for questions. We have Vivek Agarwal with us, and if anybody has specific questions about Mad*Pow, I think we will cover that, which is an acquisition we did today.

So with that, operator, can we throw it open to the questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Ravi Menon from Elara Securities.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [2]

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There was -- again subcontracting costs has gone up about $176 million, more or less, so about $8 million, I think, $8 million or $9 million quarter-on-quarter. Is this largely due to an increase in the HCI because that's project-based? Or this is largely due to the large lease that you are ramping up?

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Manoj Bhat, Tech Mahindra Limited - CFO [3]

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I think predominantly because of HCI. Because clearly, there is some short-term contracting work which we take on board because many of these are quick ramp-up deals. Now I'll also qualify that, if I look at HCI, some of them are short-term employees and some of them are short-term subcon, so it is probably going to be in both those buckets. The other thing is, of course, if I look at certain of our revenue streams, especially in the TME vertical, I think we have had increase in subcon costs there, which is because of the nature of work, which is, again, we will need specific skill sets for about 2 or 3 months. So we are seeing some of that, too. So those are the 2 big reasons for the increase this quarter.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [4]

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And the 188 basis points headwind in cross currency. This seems to be significantly higher than, say, what Infosys has reported. But let's say the major currencies that have cost us, when you look at your exclusive pound or the euro or even Australian dollar, which you give, that doesn't seem to be very different from what they have. So other 25% which is miscellaneous currency, anything there that you'd like to call out?

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Manoj Bhat, Tech Mahindra Limited - CFO [5]

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So I'm assuming you're referring to the year-on-year number, Ravi?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [6]

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No, the Q-o-Q.

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Manoj Bhat, Tech Mahindra Limited - CFO [7]

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Q-o-Q is not 188, it's about 0.6, 60 basis points.

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Operator [8]

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The next question is from the line of Mohit Khanna from Future Generali Life Insurance.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [9]

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I had a question regarding the margin trajectory for the company. If we see for the past 2019, while we continued to win deals, our margins kept on sliding. And now we are at 11.5% on EBIT margins for this quarter, which is 4 percentage points below quarter-on-quarter and 2 percentage points nearly year-over-year. So is it fair to say that Tech Mahindra would be a company with 11%, 12% or 13% EBIT margin company or probably a 15% is achievable in coming quarters?

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Manoj Bhat, Tech Mahindra Limited - CFO [10]

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So I think if I look at our margin trajectory, I think, clearly, part of this drop, as I explained, is a function of 2 or 3 things coming together in the same quarter, so which is your seasonality on the Comviva Mobility business, it is also the salary hikes and the H1B. Now if I add all of those, it is about -- a swing of about 240, 250 basis points. And there's a 60 basis -- I think 50 basis points approximately of currency, so that's 3%. So -- and if I look at the total decline of 380 basis points at EBITDA -- EBIT level, right, quarter-on-quarter, that balance 80 bps, right, is really because I think we have -- the utilization has dropped. And we are investing a bit in transition costs. So that's the way -- and historically, what you would have seen even last year is, we make up the margin on the salary hikes, which we give, which comes during the year. We make up margins on the seasonality because it -- the business operates at a certain level which is steady in the mid-teens. So some of those will go away. So which leaves effectively currency transition and potentially utilization kind of costs in there.

Now again, 2 of these will improve with revenue growth. Currency is something which we can't control. So that's the way to look at our margin, and that's the way we are actually focused on trying to swing this around. Even if I look at last quarter, if I remember, it was EBIT -- I don't remember the EBIT right now, but EBITDA was about 16.4%, which then jumped higher and so on and so forth. And I think, specifically, there was a currency headwind -- sorry, tailwind last year and there's probably a currency headwind today. And that's one of the differences also on margins.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [11]

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So in the medium term, 13% EBIT margin is what we can look at even though it is 11.5% today?

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Manoj Bhat, Tech Mahindra Limited - CFO [12]

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So we don't guide in terms of what would be a margin level. But do we have the levers to hit a 13% margin that's -- in my mind that's clear. But of course, I have to balance it out with 2 or 3 things, right? So there is currency, there is potentially -- it's -- many of these deals get bunched together. There will be an impact of transition costs as well as some investments we are making ahead of time in facilities, in people, in certain skill sets, a dependence on subcontractors. So -- but to me, do we have the levers to hit 13%, absolutely.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [13]

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Fair enough. And one question, if you could comment on the latest acquisition, what was -- what is the company's [biggest] revenue for the full year and the margin that it made?

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Manoj Bhat, Tech Mahindra Limited - CFO [14]

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I'll ask Vivek Agarwal who heads Corporate Development and BFSI. He is also on the call, to answer that.

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Vivek Satish Agarwal, Tech Mahindra Limited - Global Head for Enterprise Verticals Solutions & Portfolio Companies [15]

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So the full year revenues for the current year are $17.5 million, and the margin is in the mid-teens. And the way we've looked at this acquisition is a significant amount of synergy opportunity across health care, financial services and the media industry, where Mad*Pow brings in thought leadership in digital transformation using digital analytics as a key lever.

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Mohit Khanna, Future Generali India Life Insurance Company Limited - Sr. Manager of Equity Research [16]

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Great. And we paid around $17 million?

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Vivek Satish Agarwal, Tech Mahindra Limited - Global Head for Enterprise Verticals Solutions & Portfolio Companies [17]

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So the structure is that we are buying 65% up front and for that 65%, we are paying about $17 million. That's correct. And the balance, 35% will be acquired subsequently from the management team and the founders who are staying with the business.

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Operator [18]

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Our next question is from the line of Sandip Agarwal from Edelweiss.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [19]

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Manoj, you have already answered on the margin side in quite a detail. I just wanted to know a bit more on the demand environment [in spite of your] historically high deals. We are not seeing traction showing up in Communications even if you assume that Comviva had a significant impact

(inaudible)

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Operator [20]

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Sorry, Mr. Agarwal, your audio is breaking. May I request you use a handset and come in the network area, please.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [21]

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No. I'm speaking on the handset only. Sorry, because I don't know if there is a network issue. But -- so, so am I audible now?

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Operator [22]

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Yes, you are.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [23]

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Okay. So my question is to C. P. and Manoj basically is that why does growth have been so low even if you assume that you have Comviva has not grown. But at least except Comviva, don't you think that some negotiations should have contributed at least some portion of growth and even Enterprise should have shown some strong recovery because we had been seeing deal wins, quite significant jump in deal wins for quite some time now?

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Manoj Bhat, Tech Mahindra Limited - CFO [24]

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So Sandip -- so I think fair question. So I think from a perspective of -- let me first pick the Communications vertical. And clearly, we had 3 quarters of growth. And potentially, I think what we are seeing is a pause. As we had indicated last time also that we believe that our growth this year will be higher. And I think if I really look at what we feel looking at the funnel and the conversion rates which we are seeing. I think we do believe that, that conviction has only increased after this quarter.

And to your specific question on what happened this quarter? Of course, when you have ramp-ups in certain deals, I think there is a little bit of a plateau sometime and sometimes there is also a timing issue. So I think that's what you're experiencing, and I think that will correct itself.

On Enterprise, we were always talking about a softer quarter. I think if I look at the broader trend there, I think there is a slowdown, which we are seeing, specifically in the auto vertical. I think we are also seeing some sort of a slowdown broadly in Europe. I think that's 2 buckets right there, which are being -- if I look at the Enterprise side of things, that's one thing, which is dragging. So if you remember, I think in the previous quarter, we had indicated that Enterprise will be soft, and it is almost like a period of 1 or 2 quarter. And that's why we have said that from a full year growth perspective, we would look at a lower number than we were looking at in the past.

Now again, coming back to whether our outlook for the full year has changed. Potentially, with these deal wins and others which are in the funnel, I think we are. We still have a very good shot at meeting our view and outlook which we expressed on the previous call. And that is just a function of what we are seeing out there in terms of deals where we are down-selected to a position where we believe we have a fair shot at winning the deal. So that's one way to look at it.

The other side of the story is, if I look at some of our customers and specifically, again, in auto, I think we have seen some softness from the EV market in China, for example, that's one of the reasons for this decline. And those, I mean, have been fully baked into the numbers. So to me, that negative drag will potentially start going away. And that has played out over a couple of quarters. So that's the other, probably, sequential view of things, which will also start helping this reported growth numbers going forward.

So that's my quick view on how we look at this, and that's why we are saying that we look at the full year, we are looking at growth acceleration coming through the quarters and potentially a very strong second half of the year.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [25]

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So Manoj, if I can squeeze a very small follow-up on that? So basically, if I put all the 3 pieces together as you explained, like Communications maybe slightly better and -- because of the deals and other (technical difficulty) maybe a little softer and then on the top of that there are some losses on the margins, which are a little longer and the ramp-up of deals and everything. Basically, the math suggests that this year probably we will not see -- even if you may see some revenue growth, we may not see any earnings growth. Is that a fair calculation? Or -- and I'm not asking for outlook but is the direction of the thoughts right?

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Manoj Bhat, Tech Mahindra Limited - CFO [26]

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So if I really look at it, I think -- as we stand today, I think there's a currency impact. So are you excluding currency, including currency, but leave that aside for the minute. So from a full year perspective, while I can't answer an EPS kind of question, I did articulate the levers. And if -- and I think it's a function of 2 things in my mind, right? When do we close these deals? And how do the transition costs bunch up? So for example, if I'm looking at then closing early this quarter, potentially some of the margin recovery should start happening in Q4, right? So it's a bit of question about timing of conversion of these deals from funnel to actual. And then -- so if it comes later, I think then the margin impact we cannot take away the transition margin impact that easily. I'm sorry, I'm giving a roundabout answer because there are variables involved. Yes?

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [27]

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Yes, no problem. That's very helpful.

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Operator [28]

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The next question is from the line of Pankaj Kapoor from JM Financial.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [29]

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Manoj, in the last conference call, you had mentioned that for the top line, you were looking at about 8% to 10% kind of a revenue growth, and your base case margin outlook was of basically a flattish margin at the quarter close currency rate. So today, out of these 2 which one are you more confident of?

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Manoj Bhat, Tech Mahindra Limited - CFO [30]

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As I indicated, and just to clarify, Pankaj, 8% to 10% you meant on the comms side or what?

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [31]

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I think what you had mentioned was the overall growth was 8% to 10% with comms being higher than what we indicated earlier. And maybe around -- and Enterprise going lower than that.

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Manoj Bhat, Tech Mahindra Limited - CFO [32]

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I think, Pankaj, I did say that. But let me answer the question differently, right? So the way, I think, given where we are, given the conversion, I think the revenue visibility has increased dramatically. And I think we are far, far more confident of meeting and beating whatever we thought was the previous kind of number, right? And to me, that was more like I had said, if I remember, some of the statements I had made, we were first at mid-single digit on comms and then we said it has improved, and now we are saying potentially it's improved further. And on Enterprise, we were in that industry growth rate range, and we had said that because we had missed a couple of quarters, it has dragged lower. So given this quarter, which has happened, I think -- and looking at the funnel, I think we believe our confidence level is higher on achieving those kind of numbers, right, number one.

Number two, on the margin side, ex currency, I think there are 2 things which have happened, right? So one is, of course, I do believe that as we go into this acceleration phase, we might see some margin drag because of transition, which we are already seeing some of it coming through. And that might change the numbers a bit towards the downside. And I think then it depends on the, as I explained, which quarter and how the deals come through and which deal comes through and what is the understanding with the customer in terms of whether a TCO-based saving structure and so on and so forth, which are the variables I was alluding to when I was addressing Sandip's question.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [33]

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Got it. And I don't know if Manish Vyas is on the call, but I had a couple of question on the telecom side. So C. P. alluded to a large deal or rather a deal pipeline getting built up on the 5G side. So any color in terms of what kind of a scale of these deals are? And where are we in terms of decision-making process?

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Chander Prakash Gurnani, Tech Mahindra Limited - MD, CEO & Director [34]

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So -- I mean, I'll try and get Manish on the call, but the way things are is that 5G licensing hasn't been very fast. As you know, China has taken a lead, South Korea just launched the 5G. In a month, they got about 1 million subscribers. 5G use cases for Enterprise are being developed. And our last win with Rakuten in Japan and in Bangalore are working very, very well. We are in advanced conversations with 2 or 3 customers which want to deploy 5G as their differentiator in business. That means Enterprise customers wanting to look at 5G use cases. So I would think is that the full blown year for 5G is actually going to be FY '21 and FY '20 would remain as a warm-up year. Though in the U.S., 5G has now been launched in almost 12-plus cities and -- but it is very clear that B2B would be the biggest beneficiary.

On the large deal front, as I said, our pipelines are stronger. Our current weighted pipeline is slightly favoring Communications business. Enterprise business is, when you look at the weighted qualified pipeline then Communications business pipeline, I'll give you different examples, BPOs in New Zealand onwards to network practices to modernization of the legacy [techs], to launching new services with the help of 5G. So the pipeline is -- the good news is that pipeline covers majority of our service offerings. If Manish has joined, Manish, I don't know how much you heard, but if you want to chime in?

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Manish Vyas, Tech Mahindra Limited - President of Communications, Media & Entertainment Business & CEO of Network Services [35]

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Well I do C. P. I think in addition to what C. P. just said, all I would say is that when we look at 5G, there are -- and we have been consistent about it, that there are 3 type of businesses and transactions that will happen. One, which is around deploying, integrating the 5G and related technologies. Second is enabling and readiness for 5G, which is lot of other digital change type offerings and opportunities in -- across BSS and the landscape. There's a huge opportunity in that space, and that's underway. And the third is, there will also be lot of displacement, which is, as companies start getting ready for 5G, there will be opportunities that we are in good discussions on starting to help people create the capital for them to generate the bandwidth for the 5G deployments. So we are -- our company is right now busy with discussions across all 3 spectrums, which is what we call as the run, change and grow in one format. So I don't think I want to add anything more to that, but we are extremely busy in a couple of good conversations as we speak.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [36]

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Right. So Manoj, just one last question on the capital allocation, you have been saying that anything excess of a particular level of cash you would like to return to the shareholders. So can you clarify what is the level of cash balance that you will be comfortable with?

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Manoj Bhat, Tech Mahindra Limited - CFO [37]

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So in my mind, we've not thought of a number per se. So if I look at the level of cash flow we generated last time, I think we paid out almost all of it because we hardly did any M&A deals. And to me that's probably a model to think about that as and when we don't use up cash for M&A and other investments, we would be inclined to return it in whatever form to the shareholders. And that -- we have said that multiple times in terms of excess cash, and that's something which we intend to continue.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [38]

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So I can safely assume 90% to 100% of free cash flow each year is something what you can return to the shareholders.

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Manoj Bhat, Tech Mahindra Limited - CFO [39]

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It's not a stated policy. So -- but I think it's a statement of intent, right? So that (inaudible) as if we are going to use it. Yes.

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Operator [40]

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The next question is from the line of Surendra Goyal from Citi Group.

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Surendra Goyal, Citigroup Inc, Research Division - Head of India Equity Research, Director and Senior Analyst [41]

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Just had a couple of questions. I am just trying to understand things a little better here. So large deal wins in FY '19 were up 28% year-over-year. And in the last 3 quarters, you have been doing $400 million, $500 million of deal wins a quarter, while growth Y-o-Y in this quarter is around 2% or so, and Y-o-Y, obviously, takes out the seasonality. So how should we reconcile deal flow with growth? Is it really a lead indicator? Or is there going to be a limited correlation of -- for growth with deal flow going forward?

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Manoj Bhat, Tech Mahindra Limited - CFO [42]

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I think, Surendra, thanks for that question. So if you really look at it, and I did explain it in bits and pieces across multiple answers. So 2 or 3 things are happening. I think one is, clearly, I think if I look at the comms side, I think, while there are new deals which have ramped up, I think the traditional business, of course, it's not growing, which we have said before, right? And that's a trend, which is kind of universal.

The second thing is, if I look at manufacturing and specifically auto, I think that's one more vertical which has not done well, if you take that period.

I think the third thing is that, if I look at constant currency, that the 2% becomes probably a higher number, more like 4%, 4.5%. The fourth way to look at it is that I think the combination of all these things is probably giving that view that the business is dealing from the deal wins. As we stand today, there is some declines, and we've spoken about it also in multiple discussions in the past that one of our large Enterprise customers was going through a change period which has impacted revenues. It's a large conglomerate.

So multiple reasons there about when you look at that metric. Now as we look forward, I think there is stability in some of our customers' revenue streams. I would say, and I answered this before in one of -- when I was answering one of the questions, that there is some stability which we see on the auto vertical side, and that's something which we are -- because it's been declining for a couple of quarters now. And so that's the way I see it, and that's why, from now on, I think, when we see the deal wins, I think it should translate into revenue growth in a much more meaningful fashion.

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Surendra Goyal, Citigroup Inc, Research Division - Head of India Equity Research, Director and Senior Analyst [43]

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Sure. And just on the margin side, one more question. So I think you mentioned the number 13% in an earlier answer. So is that a realistic estimate given that you started a lot lower? And I think you mentioned in response to another question that there could be some impact of ramp-ups on margins in the near term. So when you put it all together and assuming that currency remains at current level, is that a realistic number to work with for this year?

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Manoj Bhat, Tech Mahindra Limited - CFO [44]

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So I don't have a margin guidance right now. What I was answering was, I think the question was is 13% possible. And I said yes, 13% is definitely possible. And of course, we will try to maximize margins to the extent possible.

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Operator [45]

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The next question is from the line of Viju George from JPMorgan.

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Viju K. George, JP Morgan Chase & Co, Research Division - Research Analyst [46]

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I think my questions have been answered.

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Operator [47]

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The next question is from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [48]

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Just on the Communications side, when we say the pipeline edges higher versus the Enterprise side, is it broad-based across our large clients in each of the geographies of U.S., Europe? How has it been? Because of your large clients in the North America has been awarding larger deals to some of your global peers. So just wanted to understand, is it that we are not competing for that kind of a deal? Or is it some amount of wallet share competition, which is happening in that account? And this is a broader question in terms of how you say that what makes you believe that the pipeline is stronger in Communications side?

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Manoj Bhat, Tech Mahindra Limited - CFO [49]

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So Sandeep, I really don't want to comment on a particular client view and what's happening there. Suffice it to say that, obviously, we are winning deals across the globe and the funnel does cover some of that. So if I look at some of the deals in the pipe, I think there is a couple of deals in Europe. There's one deal in Asia-Pac, and then a couple of deals in the U.S. And that's something which we'll have to see how we convert. So that's why I think we feel very, very positive about the momentum and the growth, and that's why we are saying this, that we do see that we are in a position to win some of these deals at least, if not better than that, right? So I think it's a very short answer, and I definitely don't want to comment on any specific client or anything which is work in progress in terms of deals.

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Sandeep Shah, CIMB Research - VP [50]

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Okay, okay. But there is no worry in terms of any kind of a wallet share loss in any of our clients, especially in Communications side?

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Manoj Bhat, Tech Mahindra Limited - CFO [51]

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So I think that is subsumed in probably what we said, right, that I think we are reaffirming and feel more confident about revenue growth in the comms vertical.

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Sandeep Shah, CIMB Research - VP [52]

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Okay. That is helpful. Just a follow-up to that, Manoj, I think you said that the high single-digit could be a possibility in the Communications, which you implied. And if -- earlier, you were saying that you were looking at Enterprise growth lower than the industry, but the confidence is now better than what you had estimated earlier. So for overall consolidated revenue growth of 5%, the ask rate is almost like 3% Q-on-Q for the next 3 quarters taken together the Communications and Enterprise. And this would be actually looking at your comments, you are targeting higher than 5% growth. So am I directionally correct in assuming that looking at the pipeline and the deal wins, more than mid-single-digit consolidated revenue growth could be a better target to watch out for? I'm not asking for guidance, but is it directionally correct based on what the comments you are saying?

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Manoj Bhat, Tech Mahindra Limited - CFO [53]

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So I think if we convert the deals in the time frame we are seeing, we have already indicated that, it's going to be a very strong second half of the year, yes.

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Operator [54]

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The next question is from the line of Sumeet Jain from Goldman Sachs.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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So firstly, Manoj, I wanted to understand in the Communications vertical, I mean, we had a very strong deal win last year on a Y-o-Y basis, it was up quite significant. And you mentioned, excluding the Comviva seasonality, the growth was largely flat in constant currency terms. So I mean, does that mean that the traditional business in telecom is still declining for us out there?

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Manoj Bhat, Tech Mahindra Limited - CFO [56]

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I did mention traditional business was flat. So think of it as a step-up ramp kind of model, right? So you have to constantly win deals to ramp up, and otherwise, we are flattish. That's what seems to have happened this quarter.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [57]

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Got it, got it. And I mean on the margin side, I wanted to understand, I mean, the portfolio company was one of the key levers for you in the last 1.5, 2 years. And this quarter, we had a 100 bps kind of a negative impact on margins. So can you let us understand what the nature of this margin impact is? And can we recover it going forward?

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Manoj Bhat, Tech Mahindra Limited - CFO [58]

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Actually, the portfolio company impact is probably higher than 100 bps. But out of that 100 bps is the seasonal component, right? So that's something which I did mention in the beginning that will equate itself out on a full year basis. What has happened is some of our portfolio companies have been impacted by the slowdowns I was indicating in terms of both revenue and margins. And that is something which we have to work on because that is now driven by a market event and a demand event. And that's something we have to work out on. And incrementally, if I see from last quarter to this quarter, that is one element, which is new, which is something we have to work through, yes.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [59]

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Got it, got it. And lastly, on the manufacturing vertical outlook, I mean, this is the steepest decline we have seen for you for the last several quarters, and you highlighted the EV market in China is one of the reasons for that. But can you help us understand what's the percentage exposure for us in manufacturing towards the China EV? Because if the trade war continues for...

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Manoj Bhat, Tech Mahindra Limited - CFO [60]

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So right now, it's gone down to 0, almost 0. So because we are out of those engagements.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [61]

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Okay, okay. So going forward, we will not see further decline in manufacturing vertical at least?

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Manoj Bhat, Tech Mahindra Limited - CFO [62]

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Yes. At least, the China EV was the question. So in other words, I do believe that from an overall vertical perspective also, I think the drag we see it being minimized as we go forward. Yes.

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Operator [63]

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Next question is from the line of Diviya Nagarajan from UBS.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [64]

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Two questions here. Could you kind of give us a sense of the 36%, 37% exposure you have for digital and how margins look there versus the rest of the business? That's question number 1. And on 2, I think, you have talked about certain subsidiary impact on margins, could you just highlight which of the subsidiaries have seen the most impact on margins (inaudible)?

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Manoj Bhat, Tech Mahindra Limited - CFO [65]

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So the second question first, so I don't want to get into individual subsidiaries. Because I think -- but just to give some color, there are 2 which have changed this quarter, out of which, one, we believe, will be fixed pretty quickly. And the other one is a probably more structural issue, which we have to work on. And I think on the first question, sorry, Diviya, what was your first question?

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [66]

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How do your digital [balance] compare to the rest of the company?

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Manoj Bhat, Tech Mahindra Limited - CFO [67]

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So we have never disclosed it, but the way I think about digital is, of course, in terms of realizations and per head as well as cost per head, it's higher. I think -- but also, we are investing a lot. So at probably an EBITDA level, including investments, probably it is, with this quarter, marginally higher than the rest of our business.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [68]

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Got that. So I'm also trying to reconcile the impact it has on your overall margins because we have seen a fairly strong ramp-up in the digital in the last few quarters and its margins are slightly on the positive side. Why is that not able to offset some of the negatives that you're seeing out there?

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Manoj Bhat, Tech Mahindra Limited - CFO [69]

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So that will...

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [70]

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The other way round, at what concentration of revenue does the offset really kick in for you?

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Manoj Bhat, Tech Mahindra Limited - CFO [71]

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So I think this quarter, specifically, if that is the question, I think a lot of our Comviva revenue, right, we would classify as digital and because there's a lot of business we do in mobile payment, enabling mobile payments, enabling video and such applications for our customers as well as there are a couple of analytics platforms and so on and so forth. So clearly, if I look at this quarter, standalone digital, of course, the margin would have dipped even this quarter because that impact would be all pervasive and it will impact the overall margins. So -- but generally speaking, I think, as I said, that now we would see the digital as slightly higher than core business margins on a 4-quarter average basis, yes.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [72]

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Got you. One last question, if I may. From a contract flow perspective, clearly, as you've explained, the new contracts are not able to fully offset in terms of the declines that you're seeing in the traditional portfolios. So what kind of deal flow should we then be targeting for that offset to really start working for you?

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Manoj Bhat, Tech Mahindra Limited - CFO [73]

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So I think what I said is, if I look at the last 3, 4 quarters, I think that was true because there was certain other factors at play. As we see some of the pressures around, specifically, as I hinted, at auto and some of our customers' cycles, I think we do expect stability. That's why we expect that some of that will start coming into the growth numbers in a much more meaningful manner.

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Operator [74]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [75]

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A couple of clarifications, actually. One is, what would be the Ind AS impact this quarter on EBITDA?

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Manoj Bhat, Tech Mahindra Limited - CFO [76]

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About 60 bps, give or take. But that's why when I was answering, I was answering mostly EBIT because that's probably a better way to look at it because there's a little bit of difference between EBITDA last quarter and this quarter.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [77]

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Yes. Right, right. The second is, if you look at the commentary on margins. Well, you did mention that the 13% is something that's doable. You also had a couple of caveats in terms of possibly tranches and costs and deals are actually really investments on facilities ahead of time and so and so forth. So it appears there are moving parts to that 13% as well. Is that a fair understanding overall?

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Manoj Bhat, Tech Mahindra Limited - CFO [78]

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So Nitin, I think there are moving parts either way, right? So under certain scenarios, it could be below 13%, under certain scenarios it could be above 13%. So as I said, I was answering a specific question from someone saying, do you think 13% is achievable, and I said it is achievable. But then I said that, but it depends on the timing and how the deal flow is going to be considering some of the deals we're looking at are fairly large in size, right? So -- and I did say on the call, I'm giving a roundabout answer, but that's the situation at the moment. And as we have better visibility into what is the margin which we can come back and say that -- and that's probably going to happen in a quarter or so, we will know where we stand with a lot of the deal pursuits. And that might be a much better time to think about margins in a more structured manner, which you're looking for, right?

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [79]

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Sure. The other thing was, if I looked at the growth overall for the Enterprise side of the space. It appears that it requires a fairly strong run rate over the next 3 quarters to be even close to mid-single digit. And if we expect the pickup to happen in H2, it appears to be quite meaningful in terms of the pickup that's required. So how do we basically see Q2? Are there worries around underlying pressure in the business for the near term for Q2? Or do you think they will be fairly even?

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Manoj Bhat, Tech Mahindra Limited - CFO [80]

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I do expect -- I mean, Nitin, the way to think of this is that -- so if I look at the business into 3 buckets, right? So large deal wins. I do believe we'll have a strong quarter even in Q2 in terms of the wins. Second is in conversion into revenues, we will see partial conversion starting to happen in Q2 of the previous wins. And then building up momentum from there, right? And that's where I'm indicating a stronger H2, a very strong H2. And that's something which we are building into our base case. And that's something which we believe will happen, just considering where we are on some of these deals. So is there any other perspective you wanted, Nitin?

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [81]

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Yes. So from what you're saying, I think, overall, it looks like we will end the year with a very strong exit and much greater -- and a much better sort of clarity on margins and a base for the next year. That's a fair takeaway, right?

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Manoj Bhat, Tech Mahindra Limited - CFO [82]

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That is a fair takeaway that the exit will be strong. That's what we anticipate as we see it today. And of course, by that time, given that the margin situation in terms of what or how the transition cost evolution happens and how the recovery has happened of whatever we have seen as headwinds in Q1, I think we will be in a much better position to see that. But I'm also saying that end of Q2 is a much better position, again, to look at margins and given that there are these multiple things in the pipeline, yes.

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Operator [83]

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The next question is from the line of Ashwin Mehta from IDFC.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [84]

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Manoj, I had a question on the BFSI and the retail piece, which has been sluggish for you. So what's the outlook there? When do we start to see a recovery there? And secondly, this quarter saw the other segment drive your growth. Now that being the HCI business, which is typically project-based, how sustainable does the growth look in terms of looking at how the pipeline is shaping up for you?

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Manoj Bhat, Tech Mahindra Limited - CFO [85]

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Yes. So I think your question -- there are 2 questions you are asking, right? So one is BFSI, why is it sluggish, when do we see a recovery? Second is HCI, do you think it is short-term growth and what -- and I would kind of answer it in 2 ways. So one is, of course, what HCI does in the synergy kind of pipeline. So I think Vivek can answer probably both the questions. He's also looking at portfolio companies as well as the BFSI practice. So Vivek, why don't you pick that up?

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Vivek Satish Agarwal, Tech Mahindra Limited - Global Head for Enterprise Verticals Solutions & Portfolio Companies [86]

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So again, the second question first on HCI and health care. So the focus on the business in HCI is to get to long-term multiyear contracts with the -- in the health care ecosystem, especially the providers. And some of the projects which are shorter-term implementation projects will continue to be part of the portfolio. So what you are seeing is building long-term scalability in the business and not only doing the short-term implementation projects. And I don't know if that answers your second question. And on BFSI in terms of continued sluggishness, our pipeline and deal wins gives us the confidence that there is a reasonably healthy growth in the future. And as you know that over the last few quarters, the business has scaled up significantly. So this is just a cycle around implementation of projects, et cetera. So there isn't a -- we don't see a fundamental issue with the effect of the pipeline.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [87]

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Okay. And if I can squeeze one more. This is on telecom where you mentioned that there's an opportunity in terms of displacement to create capital, to build bandwidth for 5G investments for the telcos. So given that we also have a large legacy piece, do you see any risks in terms of that on our portfolio?

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Manoj Bhat, Tech Mahindra Limited - CFO [88]

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Manish, do you want to pick that up, the question?

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Manish Vyas, Tech Mahindra Limited - President of Communications, Media & Entertainment Business & CEO of Network Services [89]

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Yes. No, absolutely. Yes, I think it's always a mixed bag, but this totally played for us in the past as well in 4G. We believe that our existing access rights, our existing incumbency actually works to our advantage more. There's always 2 ends of the spectrum. But the way we are looking at the outlook, based on what Manoj and C. P. have already highlighted, we feel that we are -- we stand to gain if we play our cards well, and which is what we are busy with right now.

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Operator [90]

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Ladies and gentlemen, due to time constraints, that would be the last question for today. I now hand the conference over to Mr. Manoj Bhat for closing comments. Over to you, sir.

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Manoj Bhat, Tech Mahindra Limited - CFO [91]

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Thank you, everyone, for joining this call. I know there will be a lot more questions, so please do feel free to reach out to Kaustubh and/or me via e-mail, and we'll try to answer if there are any unanswered questions. So thank you so much for attending.

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Operator [92]

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Thank you very much. Ladies and gentlemen, on behalf of Tech Mahindra that concludes this conference. Thank you for joining us, and you may now disconnect your lines.