Tech Mahindra CEO CP Gurnani swears by professor Vijay Govindarajan’s Three Box solution, where box 1 represents managing the present, box 2 stands for selectively abandoning the past and box 3 for creating the future. While box 1 is about improving the current business, boxes 2 and 3 are about driving innovation, performance breakout and growth. Gurnani believes even as there are enough growth opportunities to boost his company’s core services business in the near term, every company’s — and even the government’s — need to connect directly with the consumer; is what will drive the future of the business.
“All global businesses are looking to connect with their consumers. We want to create the technology and infrastructure to enable them to do that,” he says. And he is busy ensuring that Tech Mahindra is future ready. The company is currently looking to leverage its communications and networking expertise to offer bundled service offerings in the networking, mobility, analytics, security and social media space to its enterprise clients.
About five years ago, Tech Mahindra joined the billion-dollar revenue club and in the interim, it has grown four times to Rs.22,621 crore. Over the years, the company has managed to hike its revenue by 37% and profit by 30%, on average, through a combination of organic and inorganic initiatives. But as decision cycles got extended in the communications business, which brings in more than half of its revenue, the company’s revenue growth took a hit in the past couple of quarters before stabilising in the September 2015 quarter.
Organic growth has almost remained flat this year compared with 12.5% growth in FY14 and 14-15% in FY15. Vice-chairman Vineet Nayyar during the company’s concall post the September results, said, “Growth has slowed down in our largest vertical — communications — and this is something we have communicated over the past two-three quarters. It is something that we see as a readjustment. We are hoping that this readjustment will be over soon, after which we should be back on the growth track.”
The company’s communications business posted a 3% quarter-on-quarter growth after three quarters of subdued growth. According to the management, the consolidation in the telecom space led to delays in decision-making and projects, impacting overall revenue growth. They expect the second half of FY16 to be better than the first. Of its top 10 clients, six are from the telecom space and very much a part of the consolidation that is happening in the sector. Plus, all except one are awaiting regulatory approval for their M&A activities.
Tech Mahindra expects the approval to come through and hopes that this period of no new executable large orders ends soon. In the earnings call, the management had indicated that it is working on four or five significantly large deals across the board in telecom, including in the network services space.
Even as the company tides over short-term challenges, Gurnani does not want to lose focus on building competencies for the future. According to Govindarajan, while most companies focus on cost reduction and margin improvement, strategy just cannot be about securing profits in the short term but should also help develop plans that address tomorrow’s business.
This is what is on Gurnani’s mind. “I don’t work for P&L but for the balance sheet, and that means investing in the future,” says Gurnani. He wants to divide the ‘creating the future’ part into three areas: the first is going digical, which is foraying into businesses that have a digital as well as physical presence. Tech Mahindra believes that going only digital will not work, so it wants to enter businesses where the click-and-brick model works by creating new entities and partnering with people who already have a physical presence.
“For us, the payments bank space is just one example of what we can do using the click-and-brick model. We could do the same in retail, education and healthcare. We will look at options where we can run a digital plus physical business by creating new business entities,” he says. “We are planning to start at least five new click-and-brick businesses over the next three years. There will be at least 10 businesses that will be in touch directly with consumers like Comviva,” says a confident Gurnani.
In September 2012, Tech Mahindra had picked up a 51% stake (eventually increased its stake to 67%) in Bharti group company Comviva for Rs.260 crore. Buying the $70-million company, which has 1,500 employees, has helped cement its position in the mobile value-added services space. It recently launched its own version of a mobile wallet, called Mobomoney.
Based on near-field communication (NFC) technology, the wallet allows consumers to make online as well as offline transactions, including payments at grocery stores, tea shops and restaurants that accept only cash and has signed on 1,000 merchants for the same. It plans to have about a million merchants on board over the next five years.
Tech Mahindra was the only technology company to apply for a payments bank and one of the 11 players to get the licence from the RBI. The company’s mobility platform handles about one-third of all global mobile payments. “We are currently running large-scale operations in Bangladesh, Africa and India in the financial inclusion space. We understand the user requirements, technology and use case requirements,” says Jagdish Mitra, chief strategy officer, Tech Mahindra.
“We are evaluating how to leverage the existing technology and services and the Mahindra Finance infrastructure and reach. This is a new business and the format and structure of payments banks is experimental, but we believe that this is a long-term play.” The second part of creating the future is funding entrepreneurs within the company. Tech Mahindra has already funded some of the ideas that have managed to scale. For instance, Saral Rozgar, its job portal for blue-collar workers that has four million subscribers, was an idea that was incubated within Tech Mahindra. The final part of creating the future is automation.
“Our strategy is to promote automation thinking and adoption in all our service offerings related to run-the-enterprise or change-the-enterprise through our automation solutions and platforms,” says Mitra. Tech Mahindra has come out with its own automated platform, AQT, based on artificial intelligence and robotics. The platform will help improve productivity by about 8-10% over the next two-three years and the company has identified about 100 projects where it is rolling out the platform on a pilot basis. Once it implements the platform across all projects, the company plans to offer it as a solution to clients as well.
In fact, under Mitra, the company has set up growth factories to push innovative technologies. The objective of these factories is to identify and develop direct-to-consumer businesses, digital solutions, platform-based offerings and automated solutions. The company has set up a fund with a corpus of $150 million (Rs.933 crore) to invest over the next three to four years in start-ups that come up with disruptive solutions in Silicon Valley, Israel and India.
In fact, it has already invested in a couple of start-ups in the Valley and India. “Our criterion to invest in these start-ups is more strategic in nature: they have to be a part of the solutions we offer to our customers. We are not looking to invest and cash out on a later date,” says Mitra. Over the years, Tech Mahindra has effectively used acquisitions to diversify into other verticals and add technology or service competence. Since 2012, the company has acquired ten companies, with the latest being the purchase of Pininfarina, an Italian automotive and industrial design company, through a joint venture with M&M.
Buying into success
In September 2014, Tech Mahindra made its largest acquisition till date by buying out American global telecom network services provider Lightbridge Communications Corp through an all-cash deal for $240 million(Rs.486 crore). Lightbridge’s revenue run rate of $430 million (2014 revenue) not only takes Tech Mahindra closer to achieving its revenue target of $5 billion(Rs.33,000 crore) by 2015 but also strengthens its position in the network services space, which is estimated to be a $40-billion(Rs.2.68 lakh crore) market. LCC has built over 350 networks and designed more than 350,000 cell sites for more than 400 customers worldwide.
To beef up its presence in the BFSI space, Tech Mahindra acquired Geneva-based SOFGEN Holdings, a consulting and services company with a presence in private, wealth, commercial and retail banking solutions. The acquisition will give Tech Mahindra access to business worth $300 million-500 million(Rs.2,000-3,000 crore), which it can target.
Sudin Apte, CEO, Offshore Insights, an IT outsourcing advisory firm, believes Tech Mahindra’s domain capabilities in BFSI and healthcare still come up short compared with TCS and Cognizant. “Tech Mahindra’s BFSI revenue is around $350 million, and with that, you cannot compete and win large deals with the likes of TCS and Cognizant. So, Tech Mahindra must create a niche for itself rather than going after every deal,” he says.
Tech Mahindra’s Mitra agrees. “The ‘or’ decision is always the more difficult one compared with the ‘and’ decision. So, we tell our associates to pick their battles rather than saying that we will do everything. There have been several learnings from being focused on one vertical — in our case, telecom — and we have developed deep relationships with our clients. We want to make digital a part of the core DNA of our company and focus on building solutions and technology platforms around it. The company has changed its strategy from ‘going for everything’ to ‘focusing on core strengths’ when competing with its larger peers, focusing on end-to-end digital transformation, global risk and compliance and sub-verticals such as wealth management and pensions instead. Even as the management has guided the company towards a better second half in FY16, analysts believe that the volatility in revenue could continue for a while.
“The telecom business grew on the back of telecom providers upgrading their networks and new players investing in putting up new networks. Players such as Verizon and AT&T also outsourced a lot of their managed services. Now, there is not much capital investment happening and players like Verizon have their own offshore operations, which is impacting their revenue growth rates,” says Apte.
Analysts expect the company’s revenue and earnings to grow by an average of 10-12% over the next two years led by its enterprise solutions thanks to stronger revenue growth in the technology, media and entertainment verticals. Retail and BFSI are expected to bounce back in the December 2015 quarter.
While the company’s margins improved by 170 basis points to 16.6% due to weaker currency and lower costs, they are still lower than its larger peers such TCS (28.8%) and HCL (21.9%). According to Gurnani, investments made in non-linear initiatives in automation, platforms and digital solutions will lead to structurally higher margins over the next couple of years. Also, its latest acquisitions have dampened overall margins in the current year and once the acquired companies are able to improve their margins by offshoring some of their work, margins should improve in the next couple of years. But analysts feel that Tech Mahindra may have been a tad too late in making those investments compared with its peers.
“We were always of the view that Tech Mahindra had not invested enough in non-linear initiatives. While the Satyam acquisition did give it much-needed exposure to the manufacturing and BFSI verticals, in the time that Tech Mahindra took to integrate both companies, others like TCS and Cognizant raced ahead,” says Apte. While the management is clear that the $5 billion target mentioned earlier was a stretch anyway, challenges in its core services business have meant that the company might have to wait a little longer to reach it. Gurnani, however, isn’t too perturbed.
“We are revisiting our strategy. In January, we will release our mission statement for 2020 with revised targets. We just have to push the pedal harder on both the communications and enterprise solutions verticals as we invest to create the future.” Given that mobility solutions will take centre stage as enterprise clients and consumers switch to mobiles and tablets, Tech Mahindra does have an inherent advantage given its deep domain knowledge of the telecom sector. So, while the next couple of quarters could be subdued, the current weakness in the stock could well be an attractive entry point.