As profit dips, TechM sets in motion plan to raise margins

India’s fifth-largest IT firm will not consider acquisitions, but focus on organic growth

Tech Mahindra Ltd (TechM), India’s fifth-largest IT services firm by market capitalization, on Thursday unveiled its three-year plan, Project Fortius, to achieve a 15% operating margin.

The move comes amid a significant setback for the company, with profits plunging 52% in FY24, marking its steepest decline on record.

Under Project Fortius, Tech Mahindra will not be considering acquisitions, and will instead focus on organic growth, said Mohit Joshi, who assumed the role of managing director and chief executive officer from C.P. Gurnani on 19 December. By FY27, the company seeks to grow its revenue “faster than the top six or seven IT firms,” he added.

While Joshi did not delve into the specifics of how the revenue target would be achieved, Rohit Anand, Tech Mahindra’s chief financial officer, said the company is planning “cost-saving exercises to stabilize the margin by next year, before growing further by FY27”.

To be sure, the company’s margin was 6.1% in FY24—the worst among the top six IT services firms.

According to Joshi and Anand, cost-saving initiatives will amount to reducing expenses by $250 million per year to reach its margin target. The move will also allow Tech Mahindra to make investments in new capabilities, leading to the rise in new revenue-contributing verticals by FY26, Anand said during the post-earnings analyst call. Additionally, Tech Mahindra has revamped its internal structure, with chief operating officer Atul Soneja coming on board in August 2023. “We are mindful of the fact that we have not delivered predictability of our financials in the past. We’re now very focused on driving that predictability. There will be volatility through FY25 since we’re in the middle of a turnaround, but everything that we’re doing right now is focused on bringing that volatility down,” Joshi said. The company seeks to reduce the number of active clients, and focus on larger deals. “You want to focus on the most important geographies, verticals and clients. Every organization only has so much energy, and we want to focus it on where we see the most potential. Otherwise, over time, organizations get very complex, and the focus goes away—especially if you look at our focus as an organization, at scale and speed. We will be missing on the speed component, if we carry clients that add very little to our growth story.”

To achieve the desired targets, the company will ramp-up deals with active clients, and focus squarely on its top 80 clients who offer business valued at $20 million or above, Joshi added. “Closer integration with the Mahindra Group across various verticals will also be in order.”

For FY24, net revenue for Tech Mahindra dropped 5% to $6.27 billion, while for the March quarter, revenue dropped 1.6% sequentially to $1.55 billion. Net profit for the full year fell 52.2% to $284 million from $598 million a year ago. The March quarter fared marginally better than the December quarter, with quarterly net profit recovering 29.5%, sequentially, after falling to just over $60 million in mid-FY24.

Equally concerning for Tech Mahindra would be its operating margin of 6.1%—the lowest of the top six companies by some distance. The company had closed FY23 with an operating margin of 11.4%, which has since dropped by 5.3 percentage points. “The decline is predominantly driven by the revenue pressure that we saw (through FY24, from clients). From our perspective, we took some action on decreasing the portfolio of clients,” Joshi said.

Profit and margins appear to be key pain points for the tech major, missing analyst estimates. Bloomberg estimated the company to report revenues of $6.24 billion and net profit of $313. However, Tech Mahindra’s net profit missed targets by a fair margin. For the March quarter, too, net profit missed analyst estimates by $10 million.

Joshi expressed confidence in the March quarter “marking a low point on a year-on-year growth trajectory. Obviously, there will be volatility between quarters, but there will be a year-on-year improvement.”

15% Profit margin targeted by firm’s Project Fortius

52% Plunge in FY24 profit, its steepest dip on record