Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q3 FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. 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. Over to you, sir.
Good evening, everyone. Again, thank you for joining us on the Q3 FY 23 earnings call. You know, we begin 2023 with a special milestone that enterprise verticals have reported a billion-dollar quarterly revenue. I want to, you know, thank all my employees, customers and more importantly, the technology leaders in the company which have continued to invest on connected enterprise and connected solutions. I'm grateful that some of our leaders have remained focused on building tools and technologies in the world of cloud, AI and data, in the world of Metaverse and Web 3.0, in the world of newer solutions with 5G and AI and cybersecurity. Our team at BORN have continued to deliver record performance on customer experience management, and customer experience management extends to our service offerings in BPS. BPS also continues to deliver a record performance.
I'm also proud to, you know, thank my technology team, which has now delivered a cloud-based tech platform. It's a sector-agnostic platform which will help our clients improve their digital absorption, digital acceleration, and more importantly, cloud consumption. This we have done it in a partnership with all the hyperscalers. It's just a sector-agnostic, and we will create value for our clients. We will partner with hyperscalers. On the CME side, 5G continues to fuel the growth. 5G in enterprise, which is one of the focus areas, we have announced with Mahindra Group a 5G rollout at one of the largest and the most modern factory, an auto factory at Chakan near Pune. It is clearly a tri-party performance, as I call it, client, a telco provider like Airtel, and a value integrator like Tech Mahindra.
We do believe that this will unlock a lot more opportunities for us, and it will also be good for our clients because they will improve productivity. They will use intelligent, and more importantly, AI-driven network solutions. It will help our clients innovate, and it will help our clients, you know, run their operations smoother. On the quarter three performance, $1,668 million, I think it translates into quarter-on-quarter growth of 1.8% for enterprise. For CME, it translates into 1.9%. I mean, clearly, in a normal situation, you know, quarter three, what is internally known as December quarter, is seen as a softer quarter. I think the company has delivered good performance. In general, I can only say that, our leader in our vertical service, in our service offerings is BPO.
They are one of our largest and the fastest-growing businesses. They probably are one of the best-performing BPO companies if they were a standalone company. They have done remarkable growth in Q3 and overall also. Their year-on-year growth is close to 21%. On the operating margin side, I know there is a lot of work to be done. We are right now at 12%, but it's a commitment that our focus on EBITDA improvement, on margin improvement, and us being able to work on the levers, I think our confidence is reasonably high. Our large deal team has done overall a great job. They delivered deal wins of about $800 million. We have had good large deal wins in the Americas and both in telco doing even the platform for the future OSS.
We have signed a multi-year partnership with a digital well, wellness and a health technology company. Overall, digital transformation and business transformation has been the key to the wins that we have had this year. You know, I know there are broadly questions regarding the macroeconomic environment. I can only say that the company has decided that we are going to become a lot more agile. We will be looking at our operations, alignment with 1,290 customers now on a monthly basis. Earlier, we used to do it on a quarterly basis, but. The reason is very simple. On one end, when I look at my deal pipeline, when I look at my three main value offerings, which is cost transformation, digital transformation and business transformation, we are still seeing, probably record high deal flows.
At the same time we have seen a few clients, hit the pause button for the discretionary spending. We obviously want to remain better with the customers, better aligned with our back-office operations. We want to be more responsive to our customers and hence we are going to go into the monthly, you know, demand and business plan management. Again, inherent strengths of the demand is strong, drivers for the demand are strong. The impression that we're getting is that our investments in Metaverse, Web 3.0, blockchain, 5G and some of the platforms will be helpful. Cloud continues. AI-enabled Metaverse continues to be the, you know, the best service offering right now.
We do recognize the near-term challenges, but more important is we are confident that our customer base is our biggest asset, our workforce is our biggest asset, and we will create a much more agile organization. Rohit, over to you with your set of numbers.
Hi. Good evening, everyone. Let me now cover the company financials for the quarter ended December 2022. We ended our third quarter with a revenue of USD versus 1,638 million last quarter, up 1.8% quarter-over-quarter. Adjusted for FX, the growth comes at 0.2%. Growth was broad-based, with SME growing at 1.9%, enterprise growing at 1.8% over the quarter. Revenue in INR terms was INR 13,735 crores versus INR 13,129 crore in Q2, up 4.6% QoQ. The EBIT for the quarter was at $200 million versus $184 million in Q2. The EBIT margin was at 12%, an improvement of 60 basis point. We got some tailwind from the currency, which helped.
We drove operational rigor as we'd committed, which was partially offset by certain SG&A increase. Moving now from EBIT to other income for the quarter. We had $30 million of other income versus $36 in Q2. Forex gain was $15 million compared to $16 million. The tax rate for the quarter was at 27.6%. The PAT for the quarter is at $157 million, and the net profit margin for the quarter is at 9.4%, which is a 40 basis point drop from Q2, mainly because of the rate of tax at a lower point last quarter versus this quarter. Our free cash flow for Q3 was at $31 million, which is 20% of PAT. Since some of the billings were impacted by furloughs, we had some FX impact on revaluation as well.
We'd also said during last quarter that we had some movement from Q3 to Q2, which due to which the Q2 cash flow was very high. That has got normalized as well. When you look at the year till date FCF number, it's closer to $350 million, which is approximately 80% of the PAT conversion. For the full- year, we still have a very strong view of FCF conversion to PAT as we move into the fourth quarter. DSO was similar to the last quarter at 98 days. As mentioned earlier, we continue to consistently follow a rule-based hedging policy. As of December 2022, the total hedge book is $2.5 billion versus $2.4 billion in Q2.
Based on hedge accounting treatment, net mark-to-market gain on 31st December was approximately $7 million, which was taken to the P&L $6.6, and the rest went to reserves, which was $0.3 million. We had a cash and cash equivalent of $780 million, which is INR 6,449 crores. We are committed to prudent capital allocation and returning back to the shareholders as per our earlier committed outlook. In summary, I would like to reiterate that we're committed towards executing the planned targeted actions of improving profitability even amid the near-term demand headwinds. With these remarks, let me now open the floor to the questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Abhishek from Nomura. Please go ahead. Mr. Abhishek?
Hello, can you hear me?
Yes, please go ahead.
Sir, thank you. Good evening to the management. I basically had two questions. Rohit, first is on your margins. You know, look, this quarter, we had, you know, good improvement on utilization and the subcon expenses going down. We had earlier thought about exiting Q4 with 14% EBIT margin. Maybe you could give us some of the, you know, additional levers, what you think you have from here on to improve the margins further.
Yeah. Sure. You know, as I said earlier, our focus on margin ex-expansion continues. From a lever standpoint, our subcon cost is still high. We have actions lined up to get that normalized, that'll continue to be an area of focus for us. You know, again, from a comparable entitlement position perspective, we will continue to drive offshoring as an action item also. That's the second lever we'll continue to drive. You know, we'd also articulated earlier that we are looking at non-strategic assets where the margins are not favorable to us and, you know, shutting those businesses or divesting them will help us. We continue to execute on that plan. That action will also continue from a structure standpoint.
You know, overall from a automation in delivery, and how we optimize delivery, this is gonna be a critical lever as we do, you know, more and more engagements on fixed price and as you see our large deal volume going up, an important part of that is driving efficiency, but driving, you know, more tools and automation. Delivery excellence, you know, I'll say is the other bucket that will continue to drive margin expansion. The last but not the least is our portfolio companies or the companies that we acquired. I think our synergy with them continue to drive actions both on the revenue side as well as on the cost. I think as we move forward, that's another area that we'll continue to work on to drive margin expansion.
Sure. Thank you, Rohit, for the detailed answer. My second question is on the, you know, demand comment. Both, you know, CP and you mentioned that, you know, the near-term demand environment is challenging. While if I look at your, you know, order booking for this quarter at least, it's still, you know, hovering in the range of around $800 million. So are you seeing, you know, any kind of a delay in execution or the, you know, the TCV to ACV translation is elongating in your deal book, which, you know, which might be an additional, you know, thing to keep in mind while we model our growth numbers?
Yeah. Maybe I'll answer it on what we're seeing and maybe CP can add on as well. From a demand environment standpoint, as CP also mentioned, you know, versus the first half of the year, definitely there is a slowdown. The decision-making is, you know, relatively slow. People are taking more time to close transactions. You know, while our deal win number is still good, I think when we look at the current book of business, which is with existing customers, there is a lot of, you know, areas where we continue to work with them on smaller assignments, and delivery engages with the clients on driving growth there as well. I think those budgets are getting squeezed as well, and those incremental small deal sizes or opportunities are reducing as well.
That, that conversion to revenue is much faster versus typically what you see on a large deal conversion standpoint, right? I think that's also playing out, as the squeeze from each and every customer, depending on where they are, how their, how their financial outlook is, how their customers are reacting to the current situation. As that environment is panning out, everybody is reacting differently and hence the point that CP made that we are being very agile to monitor our actions, conditional to those customer behavior. That's kind of, you know, a few points there. CP, if you wanna add something more on the demand environment.
No, the best is to hear it directly from Manish Vyas and Jagdish Mitra and CTL, if he's on the call. Manish, you want to go first?
Absolutely. Well, I think Abhishek, the demand scenario can best be described as where after having spent significant amount of money on digitizing both the customer experience as well as the network. I don't think broadly speaking, strategically, there is going to be any slowdown in those areas. The modernization of the telco-
Modernization of the IT stack. As they continue to work on finding out where exactly is the monetization opportunity that will come. In all of this, I think what will happen and what is happening is there will be a little tightening of the OpEx budgets, to basically find new ways of delivering services. We are going through that process of change. It's another inflection point in many ways. As we do it, what will happen is the demand cycle will slightly change in the sense we will start seeing a lot more of, cost takeout opportunities yet again, which we saw a few years ago.
I think we're going to start seeing those opportunities over the next, you know, it's difficult to try and hazard a guess on timeline, but maybe about six-seven months from now, we'll start seeing some of these deals start to sign. While I think we have maintained that the digital spend will continue to happen in agile fashion, in small, you know, bite-sized projects as they have been happening. That's really the qualifier behind how the demand is going to be happening. You know, tightening of OpEx, lower or smaller deals as far as digital transformation is concerned, followed by, as we are working on some large cost takeout opportunities, in the industry. I hope that answers your question, Abhishek.
Hi, good to be here. Abhishek, it's pretty similar to what Manish talked about in terms of the generic trends that we see in the industry. But there are obviously going to be some market and industry nuances that we'll see. I think, for example, we already know that there has been a fairly good, you know, quarter-on-quarter deal signing for us. From the demand side, we still see a similar robust growth on the enterprise verticals. There will be good growth expected on some of these verticals, especially retail, manufacturing and similarly on banking and financial services. Vivek, my colleague, can comment on that. We will see some slowdown or rather tepidness in high-tech, as you know, as they start to reorganize and look at where the spend and the allocation will be.
Broadly, we see, you know, demand being quite robust. Large deal inflow is quite strong. The decision-making, as Manish also mentioned, will be spread over a little more time than what we see now. That's how I see the overall segment play.
Mr. Bhandari.
Thanks a lot. Thanks a lot, gentlemen. Have a great 2023.
Thank you, Abhishek.
Thank you. We have our next question from the line of Rahul Jain from DOLAT Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. I mean, Rohit, to your comment on the margin side. I mean, when I look at some of the metrics right here, with the kind of growth that we saw last year and the kind of traction, which we might see, given the macro we are in. How some of these, you know, factor that you are saying are really, you know, doable in this environment because utilization is already high for you, and then you expect the subcon also to go down? Some of the factors which you are saying in terms of divesting non-strategic thing or even offshoring, what kind of impact those element will have on the revenue growth if those are the margin levers?
Yeah. I think, maybe let's take it sequentially. From a subcon perspective, we've articulated this, that, earlier, you know, from our perspective, due to travel restrictions and certain large deals, requirement to have a specific skilled subcon requirement, we had a higher subcon as a percentage of revenue, right? We've clearly articulated we have a transition plan as we move forward on substituting or replacing that or eliminating as relevant. We will continue to work on that journey. I think as we go forward, we feel we have significant opportunity on that area. Not just current quarter, but even getting into the next year, right? That will be a short to medium-term lever to continue to work on.
When you look at offshoring, again, I think while we have taken action on offshoring to drive more and more people from onshore to offshore. Somehow the way the reduction of headcount panned out, the mix from an offshoring perspective as a % of total headcount hasn't shown that change. Our view is entitlement perspective. We still have significant headroom to go there again in from short to medium term. From a impact on revenue on divestiture, I would say that, you know, we haven't really called a number, but broadly, I think we've done some actions last quarter. We have similar or slightly more actions lined up as we move forward. As we...
You would appreciate the action or some of these are a little bit structural and you have to line up a lot of aspects, depending on are you divesting or discontinuing, right? Based on that, how they pan out, we will continue to share the impact. You know, one thing is for sure, it'll be favorable to the margin, and that's a big driver of our action around that portfolio, right? So those areas will continue to give us levers significantly moving forward, not just in Q4 but even going into the next year. Broadly, those are the areas that we look.
Sure. Just one more question which is related to your active client data. It's been growing, but the pace of that has reduced significantly. Is this a conscious effort in terms of choosing the next, net new customers more in a different light altogether given the margin aspiration? Are these also related to some demand-side things?
We had a conscious process and a project where we were trying to make sure that we rationalize or right size our tail accounts, where the size of the business is at a particular threshold or below a threshold we expect, that we don't see a pipeline with that customer. Hence our focus has been to continue to work on, you know, fine-tuning that list, right? That's a conscious effort because of which we've not net, you don't see the increase, right? While we have added a new customer, but we've also taken out a lot which are suboptimal and below the threshold that doesn't give us the economies of scale for expansion. For those, in fact, turns out to be more managerial bandwidth diversion actions for us, right?
That's the reason why you don't see a net significant increase there because of that action we took.
Lastly, from a more bookkeeping point of view, the spread that we got this quarter in terms of dollar to CC was quite significant. Is it any specific reason for that, or it's a general big move in the GBP or any other factor that led to this? What we should bank for now based on the current rate?
I think it was predominantly, if you see even last quarter, we had a headwind due to currency, which was significant due to the movement we saw in GBP and Euro predominantly. This time that has corrected with some of these currencies moving back a little bit, right? GBP and Euro both. That is causing the fluctuations over last and this quarter, both negatively last time and positively this time. I don't think so there is an prediction of how it'll pan out from an FX perspective. But as we move forward and as the rates change, we continuously to model it going forward and keep you informed on how things pan out as the quarter goes.
Probably take it offline because the difference still looks very significant compared to some of our peers. Thanks for the clarification. Best luck for the timeline.
Yeah. Thank you.
Thank you. We have our next question from the line of Surendra Goyal from Citigroup. Please go ahead.
Yeah. Hi. Good evening, everyone. You may have mentioned it earlier, and sorry if you have already done so, CP, Rohit, could you talk about the trends in the top five clients? The performance year-over-year as well as sequentially looks quite weak. What is the outlook there? What should we be expecting in the coming few quarters?
Hi, Surendra. Thanks for the question. Yes. I think from a year-on-year perspective, you see a, you know, reduction in the contribution by the top five clients. I think we have couple of customers there that are having their internal, restructuring plans and focus projects that they're working on. We are partner to them on those actions and initiatives. Based on that, we see softness in those customers causing that impact. Some of it is obviously on a reported basis driven due to FX that you see last year rates versus now, it's unfavorable, right. On a reported basis you will see a couple of points dilution due to that. The second point is what I said earlier. There are certain actions that they're working on, and we very closely work with them.
That is causing us a decline when we look at it. Going forward, I think we are estimating that bottom by Q4 probably as we move forward in terms of impact. From there, you know, we'll have to work closely with them to see, as CP mentioned, the very agile, you know, resource management focus to see if we're able to support them as they change their plans on the other direction.
Sure. Thanks, Rohit. What is the CC or constant currency performance in the enterprise business sequentially this quarter?
Yeah. We have stopped disclosing that. Broadly it's not much different at an overall average basis. Enterprise has a little lesser FX impact than comms, not much different.
Okay. Last question. Are you seeing any meaningful change in deal durations in the TCV that you are doing?
Yes. We are seeing decision-making to be slightly longer than what we were seeing in the past. While the pipeline is still robust and a lot of them are towards a mature state of closures, we see still from that point to final signing, it's a little bit of a longer process because people really just wanna be sure on what are they committing to, you know, is it fitting into a probable scenario analysis for them? We're working very closely with them. We're even modeling that for them, right? I think there is an impact there in terms of... CP also articulated the decision-making is becoming slightly slower.
As we move forward, it's important that we continue to be staying close to the customer so that in their thinking we are making sure that we're close to that thought process as well as their planning as they look for the future.
Rohit, my question was slightly different. Are we seeing less smaller deals and more relatively larger deals? That was the context which I was trying to get here.
The average deal size, Surendra, hasn't changed for us. It's a similar number. Maybe in the last four quarters we saw one or two probably large deals. Beyond that, I think as I look at the current quarter mix also, we have a similar, one large deal, which is more than the average, which is similar to what we saw in the past. Not really significant change in the average deal size, for this time versus last few quarters.
Got it, Rohit. Very helpful. Thank you so much.
Thanks.
Thank you. We have our next question from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you. Rohit, first of all, you know, want to understand, you said count reduction in software side. We are now running at utilization, and I think that's even higher than pre-COVID levels. Considering that attrition still is kind of above pre-COVID and probably likely to remain slightly elevated. Wondering how much headroom we have in utilization?
Yeah. I think our pre-COVID level, probably don't have the numbers, but I remember we've operated at a utilization level of even 88%. I think that's maybe still headroom there. Generally, I think the view from a headcount perspective is more closer to, you know, as you move forward, I think it's very, as we said, the macro environment is relatively volatile. We just wanna make sure that we are, you know, actioning. And, you know, the maybe while we are actioning closer to linking ourselves to the macro environment, the linearity of correlation between headcount and growth is also diluting a little bit. From...
I mean, just to kind of clarify, we feel that there's not a direct correlation that you can apply on reduction to revenue. While there may be certain linkages, that correlation is not 100%, right? As we look forward, I think while we don't give view on headcount hiring, all we can say is that that's gonna be very closely aligned and monitored with the demand environment that we see. Given where we are, while the pipeline is strong, overall demand seems pushed to a longer decision cycle, right? What I'd earlier articulated, also the committed business may be working on the run basis with the customers. There's a lot of smaller requests and change orders that keep on coming on that business.
That is becoming more and more squeezed, which is while it doesn't show in the large deal win, but squeezes the revenue profile.
Rohit, this quarter, you know, it looks like the growth has primarily come from the rest of the world. You know, the core markets, Americas and Europe seems quite weak. Europe still done some slight addition, but almost all the revenue added, you know, $30 million or so comes from the rest of the world. You know, excluding Australia consider the AUD contribution there. That seems slightly negative. Any comments about what drove such strong performances in India? This contract that you guys are mentioning about, you know, this manufacturing plant being, you know, having introduced 5G, let IoT work in India.
Yeah, I mean, this quarter rest of the world has grown, but, you know, we've consciously said that we are very selective in India, with what deals do we pick, bid, and choose. I think from an India perspective, it's a very margin-focused strategy. From the other regions within ROW that are seemingly doing well is, you know, I will call out Middle East specifically. I think there we're seeing some good momentum there, and significantly good digital deals that we've working with the customer in that region, and that's driving the growth. That region we feel from an outlook perspective continues to be positive, right?
You know, as you look at the global macroeconomics also next year, you will see much more pressure in US, UK, generally Europe, Germany, all the, you know, developed countries. When we look at GDP growth in the, all the ROW, rest of the world countries, including MEA, Africa, Asia and et cetera, the pressure on GDP growth will be less. As we move forward, I think it's gonna be very important from a margin management perspective that as we grow in the growth-oriented regions where there is still demand, we pick and choose the right project to drive, you know, the right profitability outcome that we've articulated to you guys.
Sure. That seems to be at odds to, you know, the commentary from one of the larger peers who seem to suggest that U.S. and U.K. demand is still strong and, you know, they are looking at those geographies really driving growth even in this calendar year.
Yeah. No, as I mentioned, you look at the pipeline, right? The pipeline deal wins are still coming from predominantly U.S. and Europe. As I mentioned, there are certain client-specific top accounts restructuring that has been happening due to which we see a pressure in those geographies. I think that's also contributing for us versus maybe general view that you've got. Maybe that's a factor from a depreciation standpoint.
Thanks so much. Best of luck.
Thank you. We have our next question from the line of Sandip Shah from Equirus Securities. Please go ahead.
Yeah. Thanks. Thanks for the opportunity. Rohit, my question is when I look into the segmental IT services margin for the last three quarters of FY 2023, it has been remaining stagnated at 14.5%-15% despite IT service utilization has gone up, subcontracting cost has come down. Is it fair to link this stable margin despite operational parameters are improving with the restructuring happening in the top five clients? If yes, what is the nature of this restructuring which is impacting the margin as a whole?
Sandeep, maybe, offline, with the IR team, we can look at the last three quarters of IT. There is some play between FX that is playing out. Maybe, last quarter there was an impact on FX, but operationally it was higher and similarly the opposite way. We can, we can go through that with you separately. Generally as, from a impact perspective, you know, as we look at the growth, right, one big area is if you look at the last two quarters growth overall in the IT segment versus the previous two quarters, there's a slowdown there, right? That definitely plays an impact from a, margin actions perspective.
We have right-sized the organization over the last two, three quarters, and improved utilization, I think because of the sudden change in the growth environment, that does play an impact, right? In terms of impact of some of the key customers and what they're doing, I think it's more an internal, you know, kind of restructuring on how they are looking at their priorities and how they're trying to re-club that in a particular fashion. We are ensuring that we are closely working and consulting with them jointly in that process. Beyond that, I think since it's a customer-specific information, it's very difficult for me to, you know, divulge anything more.
There is no realization pressure, right? It's unfair to say that.
not really. I don't see there's a realization pressure.
Just last question in terms of the business realignment or restructuring, where you are cutting some of the low-margin business. Last time you called out the annualized run rate is $100 million-$120 million, of which half has been concluded in 2Q. What is the status in 3Q? Is it fair to say the margin benefit of these rationalization of low-margin business may start coming from 4Q or FY 2024, or it has already started flowing into numbers in 2Q, 3Q?
The ones which is done has already started flowing 3 from Q2 onwards. We've had limited impact in Q3. There are a few discussions which are in progress, and as we move forward in Q4, it'll continue. It's not an end that we will end the action as we end the year. I think the point is, we'll continue to work on the fine-tuning and the pruning list, going into the next year as well. You know, as we do that, depending on the nature of the transactions, the margin impact will flow through immediately or with a lag. As we conclude those, we'll communicate it appropriately to you.
Okay. Thanks, and all the best.
Thanks, Sandip.
Thank you. We have our next question from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my question. First question is, correlation between the deal wins and revenue growth. If you look at the last year, we kind of ended the year with a very strong growth in the deal wins, which translated into almost double-digit revenue growth in constant currency terms. If you look at now trailing 12-month deal win numbers, it's kind of stagnated at a particular rate of $3.3 billion. How should one think about the deal wins stagnating versus revenue growth outlook over the coming 12 months? I know that you may not be able to give any guidance in quantitative terms, but just trying to understand the correlation and conversion better. Thank you.
Yeah. I think, yeah, I mean, I won't talk about the guidance, but maybe I articulated earlier as well. While the deal wins is still in the range that we anticipated it to be, which is $700 million-$1 billion, we do see, you know, pressures on decision-making. That's one area to think about. Second, as I mentioned, beyond the deal wins that we report all net new deal wins with new and existing customers, which helps us over and above $5 million, right? When you look at outside of that, in the quarter, in the next quarter, there's a lot of activity that happens with the customer on existing projects where you're able to drive more revenue, right, through maybe an add-on or a bolt-on project, right?
That is what I was trying to tell you, that the budgets have become pretty tight with most of the customers, and those opportunities are shrinking and hence the contribution that we typically used to get from those initiatives are diluting, which is reflecting in the revenue profile as well, including the demand environment. While the deal wins look robust, there is a contribution dilution from these areas. As we move forward, that pressure will continue kind of into at least the next couple of quarters as we see the demand environment being the way it is right now.
Got it. My second question is around margins. If you would be able to provide any margin walk of this nine months versus last year nine months, what would be those two or three key factors that really dragged down the margins? In this context, if you see our attrition rates have actually come down below pre-COVID levels on LTM basis for last two quarters. What could be the possible tailwind from lower attrition on margins one can think about over the next 12 months? Thank you.
Sure. Broadly, from a margin perspective, the biggest impact for us is of course, people cost and the supply chain pressure we saw, right? From last four quarters that has had a significant impact on the overall wage bill, right? That is the biggest diluter on that basis. You know, also, there were certain other in-EBIT line items which we articulated based on the acquisitions we did. The amortization impact flows into the D&A line item. That also dilutes margin by broadly at 80 basis points or a percent. That and wage bill in my mind are the two biggest areas in terms of margin impact that we saw.
You know, from a go-forward perspective, as we mentioned a couple of quarters back, most of the impact of that had happened. Pricing increases was happening with a lag, and we had said that including other operating actions will continue to drive that to improve margin from henceforth as we move quarter-over-quarter sequentially. In terms of attrition, you know, I mean, attrition is also going in parallel while we've done a lot of internal actions, and maybe I'll ask Harsh to comment on it. Just beyond internal action, which helped us a couple of quarters forth, now in the recent few months, the market is also easing out a little bit, right? You would see this trend across.
From it, that perspective, the impact is going to be favorable on the wage bill increase. Relatively versus what we saw last year, that impact is kind of easing out. Harsh can add on the attrition trend and what we think in the market as for you to get a better understanding of it.
Yeah, thanks. Thanks, Rohit. You know, as Rohit said that we've been diligently working on reducing attrition and, you know, it's fairly under control. You know, if you look at the market while, you know, we see it easing up a little bit, but the niche skills are still a bit of a challenge, and therefore, we'll have to keep our efforts on and make sure that, you know, this doesn't shoot up. The other thing that we have to do to really make it translate into real savings is going to be to make sure that we increase our juniorization. We look at internal rotation. As you would see this quarter, internal fulfillment was much better than any of the past quarters.
We'll have to keep those efforts up. The battle is not really won. I would say the journey is still ahead of us, and we will concentrate on keeping this as is.
Thank you.
Thank you. We have our next question from the line of Vibhor Singhal from Nomura Equities. Please go ahead.
Yeah. Hi. Good evening. Thanks for taking my question. First, just two set of questions. One is, just wanted to pick your brain a bit more on the BPO business. We've had very strong growth in the BPO business this quarter. Almost $20 million of the incremental $30 million that we did in this quarter came from that business. Any color on that what drove this growth? Is it just kind of a sustainable? Was there a large contract which maybe just started in this quarter which led to this ramp up, and we might see the more normalized growth rate post that?
Just a question linked to that is how do you tie up that very strong growth to a significant reduction in the headcount in BPO business, almost 4,800 reduction. How does that tie up for the overall BPO growth?
Yeah. From a growth in revenue perspective, this is typically a seasonal quarter for us where we see a ramp-up happening, and this time it was significantly stronger than typically you'll see the trend on. I think I'll ask Birendra to comment on that because the team has done a ton of good work in maximizing that opportunity. In terms of trend, yeah, the seasonal you need to look at the headcount movements and the impact with a little bit of lag, marginally at some point. You know, we would have ramped up headcount in the previous quarter, which is now reduced in the current quarter, which is reflecting in your revenue growth. As the seasonality goes away, that headcount is reduced, right? That's kind of the way to think about it.
From a overall growth perspective, the BPS growth levers and actions are lined up very strongly for as we move into the next year as well. I think the team sees a favorable opportunity set for this set of segment for us to continue to drive positively and be very accretive to the overall portfolio. Birendra, maybe you wanna add a couple of more lines on your growth journey.
Thank you Anand and hi everyone i think you know, on Q3 specifically, Rohit has covered it all, but if we just step back and look at what we are executing, our objective has been to lead the CX segment through AI and database automation and transformation, and challenge the back office businesses through, again, tech and new delivery models. While there is, you know, overall softness in the environment, we'll continue to execute well, and we should with reasonably confident of ahead of industry growth. Thank you.
Sure. That's really great to hear. Just my second question, Rohit. Just a further clarification. You mentioned about the portfolio pruning exercise that we had undertaken just a couple of quarters back. Could you just maybe quantify to some extent as to where we are in terms of that exercise, in terms of our targeted, I mean, I mean, you had mentioned the impact would likely be around $100 million. I mean, are we through that exercise? Also in terms of margins, how much of margin accrual have you already seen? What is the kind of timeline that you're looking at maybe for the entire exercise to maybe end or end substantially, if not completely?
Yeah. I think we'd indicated that range, out of which I think last quarter we articulated, we executed, annualized run rate of almost half of it.
Okay.
Which gave a bump of possibly around 20 basis points in margin. As we look at the next set of actions, I think I probably won't quantify the margin impact, but it'll be continue to be accretive from a margin standpoint. Not just Q4, that action for us is gonna continue as we move forward into next year as well. You know, while we execute this, there is a continuous pipeline that we will evaluate even for next year from now.
Right. Any timeline as to, let's say, first half, second half that we expect this exercise to be over? I know as you mentioned, it might be a continuous process, but the last part of the exercise, when that could be over next year.
There are a lot of external factors, dependencies, around this, not just internal decision making.
Mm-hmm.
Hence I think, we wanna make sure that we find, specifically in the case of, finding the right partner, we find the right partner from a strategy fit perspective of that business.
Mm-hmm.
Where they're able to drive value, given, you know, our priority and our value, from, you know, our focus perspective something else. We just wanna make sure that we hand it to the right set of partner. If we are discontinuing, then there's a different set of actions, right, which we have to drive in terms of managing the size of the book, delivery commitments to the client, liquidating that, as per the committed timeline. I think, from a timeline perspective, depending on how we go and which way we go, it might, you know, vary because of that.
Got it. Great. Thank you. Thanks for taking my questions and wish you all the best.
Thank you.
Thank you. We have our next question from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. Rohit, just if you could help me understand this better. You're suggesting that there is continued weakness in the demand environment, and the top five customers. Are you suggesting that? This quarter we had furloughs, one would assume that the furloughs come back. The board of furloughs has happened should come back and should sort of aid revenue next quarter. I, do you believe that there's gonna be weakness despite that? How should we think about this primarily?
Yeah, sure. I think 2 or 3 points, then maybe I'll ask Manish to also talk about it. I think in certain markets we have seen the furlough decide continue not just December, but have gone through in January also. Some of the customers have extended it. It continues to impact. Maybe we might not see it in the same proportion as we saw in the last quarter, but the impact continues. That's one. Second is, I think from a top customer impact perspective, we are seeing that continuously evolve and we. Our expectation is that'll kind of be effective and reach the particular steady state by the end of the next quarter. Right. I think those are the 2 drivers that are happening.
Overall, I think from a, you know, high tech tech market standpoint, it's all over the news. You would have also read it. I think there is a lot of focus on cost and a lot of actions that the companies are driving on the right-sizing their operations and hence, you know, at some point, based on the customer profile mix, et cetera, that will continue to impact us, right. I think those are the broad, you know, headwinds that we see from a growth standpoint. As we move forward, of course, the new deal wins, all that adds on to help mitigate it.
You know, on an average, right now, headwind seems kind of being little bit more weight in the current scenario, which is still very volatile and with some changes, it changes very fast. Hence our point on being very close to the market is the reference that CP was bringing on. Maybe, you know, comms side, Manish can give you also some flavor.
Oh, absolutely, Rohit. Thank you. Look, I mean, I think growth and demand, I hope we are discussing in context and reference of the timeline. Broadly speaking, the trends in the industry, in the telecom particularly, is that there is already intense activity large deals dropping out. I mean, this is one sector where in one of the previous questions that was asked, Rohit, in terms of the deal sizes, we do expect that some of the larger deals will come back into discussions, and they are indeed already coming back.
That could be a midterm, to long- term, 2-3 quarters from now type discussion in terms of decisions. Discussions are going to happen now. Vendor consolidation is going to be a big growth trend for us in the telco sector, particularly with the solid access rights we have and the presence we have in most of the major accounts as a tier one vendor. Even with the smaller size telco, our relative positioning is that of a major provider. That puts us in a pretty good spot to take advantage of these vendor consolid, plus cost takeouts. As we continue to drive and the new budgets start getting rolled out in different parts of the world for continuing the digital transformation, because they are reassessing it as we have repeatedly said. Yeah.
I think the overall directionally, I think these are things which always have held our relative positioning in good stead, and there is no reason to, you know, to feel any different about it now. In the very short term, I think some of the decisions that the budget cuts have will induce, I think will indeed be there. We just don't know, you know, how long they'll last. They could probably be as short-lived as maybe another quarter. We do believe that overall the agile side of transformation, vendor consolidation and the large deals, I think is going to be pretty positive in the longer term for us.
Sure. Fair enough. That's quite helpful, Manish and Rohit. Thank you so much. All the best.
Thank you. We have our next question from the line of Manik Taneja from Axis Capital. Please go ahead.
Hi. Thank you for the opportunity. I know you've already fielded a lot of questions around the margin outlook and the margin levers. Just wanted to understand, Rohit, a couple of things. While you are saying that we will see further improvement in terms of subcontracting expenses, but this is an expense item which for us essentially has historically remained higher than peers. Is there a significant change in terms of our operating model that we are thinking about when we suggest that there is more room to reduce subcontracting expenses? The second question was around the onsite offshore mix or more around the utilization metrics. When we have operated 88%-89% utilization rates, our onsite offshore mix was much higher, and now you're talking about a much higher offshore mix.
Do you think we have more room to essentially improve utilization despite a higher offshore mix of business?
Maybe subcon first. I think on the subcon, as I mentioned, we have gone threadbare on each and every spend we do. Why we do it? What's the reason? Do we have the skill internally, you know, and hence we're going for it? Is it a pro-customer specific requirement? We've gone into nth level of detail there, through which we have made, you know, time-based action depending on dependencies on a project, customer need, et cetera, through which we've articulated that we will start these actions starting couple quarters back, and you can see the impact of that in the P&L. We will continue to drive that. There could be some new deals that will again come with that consideration, which will temporarily bump up that requirement.
From an action focus and DNA perspective of the company, we are changing that quite rapidly in terms of actions that drive us to get this metric, you know, as close as possible to entitlement that we feel we can get to. Right? I think that's on subcon. You know, in terms of utilization and onshore offshore, I mean, if you look at our offshore onshore ratio, I think we are, have a gap of around, you know, significant headroom versus we compared to peers there. We discount some of it because of the onsite acquisitions we've had and structural differences. Still outside of that, we feel there is, you know, quite a bit of headroom for us to work on.
Again, we've created a work stream where we are going individual by individual, project by project on who, what name of person who's gonna be moved from onsite to offshore replacement and how we're gonna drive the project execution with that change, right? Because the reason I'm explaining to it's pretty detailed. It is pretty well governed and hence our view on driving these metrics is positive. Even in terms of utilization, again, we are also thriving to drive that to the next level from a utilization perspective. Tracking each and every increase in utilization % to final billing and collection to the customer. Close looping the entire, you know, rev, O2C space from order to cash.
I think the rigor and governance, we're gonna drive that so that we get each and every percentage point increase in utilization reflect in the margin expansion will be very rigorous going forward. Given our focus on cost and specifically in a demand stretched environment, the focus on cost delivering measures is gonna be even more scrutinized. I think with that, the confidence level in driving this is pretty high. It's just that the overall demand environment being, you know, flattish, positive, negative also drives some of the profitability outcomes. I think we are balancing all of that as we look at the next few quarters.
Thank you for the detailed response, Rohit.
Through the course of this year, you had this target of getting or exiting FY 2023 with 14% EBIT margins. Is there a similar target or a timeline that you want to set for us to see your, the margins going back to that 14%-15% level?
Yeah. I mean, we are working on this very strongly internally. We've got a team set up to drive our medium to long-term expectations. We have a strong working group between operating teams, transformation and finance teams that drives this. We do have an aspiration, but, you know, from a guidance perspective, you know, I'll resist giving any guidance or aspiration. All I can say is that we do have levers. I've articulated the levers. Our endeavor is gonna be, in general, to move in the right direction of expanding margin over the short, medium and long- term in terms of how we drive our future strategy.
Sure. Thank you. All the best for the future.
Thank you. We'll take a last question from the line of Girish Pai from Nirmal Bang Equities. Please go ahead.
Thanks for the opportunity. CP, in your media interviews at Davos, you were sounding bit more positive. Incrementally, has the demand environment changed for the better over the last three months, or has it remained the same or turned worse? That's question number one. Second, the discussion on smaller deals seems to be, like, little contradictory. Did I hear that smaller deals are fewer in number, conclusively now compared to, say, six months back?
Girish, sorry, CP had our art close at 7:30 to schedule time. He had to rush for a customer meeting. You know, on his Davos comment, maybe you can send a note and we'll respond back to you. Okay. Is that okay?
No. Generally, if Manish or Jagdish can speak on how has it moved on a three-monthly basis? Has it improved, worsened, or been the same?
Manish, Jagdish, your take on this?
Yeah, I think, no, absolutely. I don't think there is any inconsistency. I, if you really play back about 10 minutes ago what I said is the overall broad commentary. Of course, we don't, I mean, I don't think, and again, like Rohit said, you may want to check with C.P. if any commentary he made in Davos was keeping in mind two months, three months or quarters in mind. Obviously, it was a more strategic broad-based commentary. Is now. That overall the industry's belief in continuing to transform through software and digital, I think is, you know, it is not a U-turn train. I think this train is moving much faster. We'll continue to see momentum in driving more and more digital transformation across the enterprises in all business processes.
We are very upbeat about it. I think from a long-term standpoint, that is great. From a budgetary standpoint, there will be a little reallocation that is happening, and that I think is segmentally. It cannot be broad-based in every single industry. My commentary was more keeping in mind some of the tier one service providers were saying, what will continue to happen. Even there, the belief is that both the 5G related modernization, both on the network and the stack, as well as the core takeout, so that they could have more cash available to try and pump into the transformation initiative. That also will be a very secular trend going forward. I don't believe there is any inconsistency there. It could just be in light of very specific timelines that we're talking about in the short- term.
Otherwise I think the things remain as promising as they were in terms of, you know, driving and helping both business process as well as the stack continue to modernize on the in almost all the enterprises.
Thanks.
Thanks, Manish. Girish, if you look at the enterprise side of the business, again, similar commentary that we spoke in the very beginning. It is starting to obviously, as we said, the demand is growing. As Rohit said, the decision-making is a little more delayed and discussed, which means that some of things will start to play out. The demand for technology to drive the transformational changes that we have invested in as a company, and we called it out, whether it is connectivity related with 5G across the Indian enterprise or whether it is cloud or experience or engineering or even sustainability. These areas have started to definitely create traction in the market. I don't think there is any inconsistency in the commentary that we've given.
What we see therefore is, as we said, some verticals, especially on the enterprise side, will drive a much better growth with, you know, silos not getting impacted for Q4, et cetera. In certain cases, in high tech, et cetera, we've seen what the news is. That's going to have a impact on the way we see the growth going forward. That's how we see it. Overall demand from the client base on areas of growth, especially driven towards automation and cost efficiency goals, seem to be quite robust.
Thank you. I would now like to hand the conference over to Mr. Rohit Anand for closing comments. Over to you, sir.
Thank you. Thanks to everybody for joining us for the quarterly results. Again, I'll recap. Constant currency growth of 0.2%, reported 1.8%, broad-based between Comms and Enterprise. Deal wins, $795 million, again, in the range we'd articulated. Margin expansion, as we had said, quarterly sequentially continues. With that, I think, we will continue to make sure we drive the value creation points that we'd articulated for our shareholders and investors. Thanks for joining. Wish you have a good evening ahead. Thank you.
Thank you. On behalf of Tech Mahindra Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.