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Naveen Sharma

Feature

$3 bn and counting
Tech Mahindra is looking to hit its $5 billion revenue target with a blend of organic and inorganic initiatives

Kripa Mahalingam

"Organic growth will get us to about $4 billion and the balance will come from acquisitions" — CP Gurnani, Managing director, Tech Mahindra

CP Gurnani’s tickets for the Fifa World Cup in June are all booked. But for the 55-year-old managing director of Tech Mahindra, this is more than an opportunity to watch some first-class soccer and spend quality time with his children, who are also flying down to Brazil from the US for the event. As technology provider for one of the biggest sporting events in the world, Tech Mahindra’s head will be in Rio to ensure everything goes off without a glitch. Four years ago, Gurnani was at Johannesburg, South Africa, as well, when the company provided IT support to Fifa for the first time. That was a success, encouraging Gurnani to be optimistic about Tech Mahindra’s performance this time as well.

That confidence was understandably in short supply barely five years ago, when Tech Mahindra took over the scandal-ridden Satyam Computer Services. While the knight in shining armour was able to convince the Fifa committee of its intentions and thus retained the IT account for two World Cups, others weren’t as willing to give the company a chance. But Tech Mahindra not only revived the fortunes of Satyam Computer but also effectively leveraged the synergies between both organisations to emerge as a formidable alternative to tier 1 players. The proof is in the numbers: in the past five years, revenue and profits have grown 33% and 24%, respectively. And in the past two years alone, the $3-billion Tech Mahindra has made a string of acquisitions that have helped augment its service offerings, besides adding to its revenue momentum. With an ambitious target of $5 billion in revenue by 2015 looming large, the company is pulling out all stops to strengthen its presence across geographies, beefing its leadership and sales team. “We are aware that $5 billion is a stretch but we have about seven more quarters to get there. Organic growth will get us to about $4 billion and the balance will come from acquisitions,” says Gurnani. How did Tech Mahindra execute this turnaround?

The journey 

The story begins in January 2009, when Satyam Computer Services’ founder admitted to cooking the books at what was then one of India’s biggest IT success stories. Ramalingam Raju confessed that over $1 billion of cash and bank loans stated as assets didn’t exist, revenue had been overstated more than 20% and operating margins were just 3% instead of the stated 24%. Three months later, Tech Mahindra agreed to buy a 31% stake in the scandal-ridden Satyam at ₹58 per share, which went up to 43% after the mandatory open offer. At that time, Tech Mahindra, which began as a joint venture with British Telecom in 1986, had around 43,000 employees, clocking revenues of around $1.15 bn. Even before the scandal broke out, Tech Mahindra had its eyes on Satyam in a bid to reduce its dependence on the telecom vertical, which brought in over 90% of its revenues, and to emerge as serious contender to larger players. Anand Mahindra had even taken the idea to Raju, who, understandably, showed little interest.

In the first three months after the scam broke, Satyam lost about 23 clients and revenue crumbled from $1.6 billion to $990 million. It was left to the senior management team, who moved from Tech Mahindra to Mahindra Satyam, to slowly revive the company back to health and restore confidence. “I think they have done a rather remarkable job with Satyam because acquisitions are always challenging, more so in this case. I think we should credit the management for restoring the confidence of the clients and investors,” says Ashok Soota, chairman and co-founder, Happiest Minds. Gurnani and executive vice-chairman Vineet Nayyar spent the next one year on the road, meeting clients to reassure them that business continuity would not be a problem.

It wasn’t clients alone who had to be put at ease. Employee insecurity was, not surprisingly, at an all-time high, since it was obvious the integrated entity would not require as many people as two separate companies. Tech Mahindra arranged floor walks every day, where senior management would meet 300-400 workers to explain what was happening in the organisation; the communications department sent out daily newsletters with updates and even ran a “news channel” with daily podcasts that included interviews with employees. “We would celebrate every small win, even if it was a renewal,” says Hari Thalapalli, chief marketing officer and global head (consulting), Tech Mahindra. An old Satyam hand who handled the people function for nearly nine years, Thalapalli was called back to handle HR during the integration to ensure a smooth transition.

Some tough decisions also needed to be taken. Rakesh Soni, who moved from Tech Mahindra as the COO at Mahindra Satyam, was given the task of improving the anaemic margins and operating efficiencies. As a first step, he got rid of excess infrastructure. “While there were around 53,000 employees, we had the infrastructure to accommodate around 85,000 employees, so we exited some long-term leases,” he says. Soni currently handles the people function in Tech Mahindra and is COO of the enterprise division. Even as the new owner voted against rental properties, it also decided to construct new campuses.  

The most difficult decision was to let people go. “We had to right-size since we were over-staffed and had lost some business,” says Soni. Tech Mahindra let go of nearly 10,000 people during this time. But, Soni hastens to add, all possible care was taken. Six months’ pay was given as compensation and those who chose to continue working without pay until they found new opportunities were allowed to do so. “It was an ugly job done with a soft touch. Once things stabilised, we were able to re-absorb about 3,500 employees,” he adds.  

Deal momentum

Nearly four years after it first picked up a stake in Satyam Computer, the merger between Tech Mahindra and Mahindra Satyam finally came through in 2013, with Tech Mahindra offering two shares for 17 shares of Mahindra Satyam. The combined revenue of the 89,000 employee-strong company stands at $3.09 billion. Post the integration, Tech Mahindra now has a comprehensive service offering, reducing its dependence on telecom from 96% to 47% and bringing in manufacturing, BFSI and media and entertainment into its fold. It also has a more balanced geographical presence across the US, Europe and emerging markets. 

By the end of the integration process, operating margins were at 22%, almost back at the stated levels of 2009. But Soni feels there is definitely still room for improvement. “In FY15, we expect the selling general and administrative expenses to come down as we reap the benefits of the investments we have in the sales and support function last year. We are also widening our resource pyramid to include freshers, which will bring down employee costs,” he says. Currently, employee costs as percentage of sales is around 63%. In FY14, 5,000 freshers were recruited and 7,000 more are likely to join the rolls this year. It also expects utilisation rates, currently at 74% compared with 78% for TCS, to improve by 100-200 bps, which should also improve profitability in FY15.

As the integration came together, Tech Mahindra not only was able to leverage its full service offering but, as part of its growth strategy, also decided to invest in its key markets. “We took the map of the world and decided the countries that mattered to us most and decided to invest in getting the right set of leaders there. We also worked on improving our execution and the productivity of our sales team. The large deals that we have managed to bag are a corollary to the steps we took,” says Manoj Chugh, global head (enterprise business), Tech Mahindra. 

Indeed, its deal wins have gone up considerably in the past four quarters. It has managed to win 48 new deals in this period, amounting to a total value of over $1 billion. Analysts believe there will be more big deals in the pipeline that will help it sustain its growth rate. According to a Goldman Sachs report, revenues are expected grow by 15% and profits by 19% during FY14-16. That will be helped in no small measure by Tech Mahindra’s spate of acquisitions.  

String of pearls

In the past two years, Tech Mahindra has made seven acquisitions (see: Inorganically inclined), including a 51% stake for ₹260 crore in Bharti group company ComViva and, more recently, big data firm FixStream Networks. While some of the acquisitions have been to strengthen its existing expertise in telecom, others have added new services lines in telecom, manufacturing and retail. For instance, the Hutchison acquisition in September 2012 gave Tech Mahindra — traditionally strong on IT services such as billing, CRM and BI — an end-to-end capability in customer lifecycle management in telecom. That can be an opportunity that can be leveraged with other telecos as well. Hutchison Global Services provides call centre-related services to customers in the UK, Ireland and Australia. At the time of the acquisition, the company had revenue of $160 million and over 11,500 employees. More importantly, buying the company brought Tech Mahindra committed revenue of $850 million over a five-year period.

Inorganically inclined

Small-ticket takeovers have bolstered Tech Mahindra's presence in key verticals

The ComViva buy was a similar win-win situation for Tech Mahindra. Buying the $70-million company that has 1,500 employees has helped cement its position in mobile value-added services (VAS). According to the company, the acquisition increases its VAS revenues by 20%, increases its speed to market by 40% and reduces its costs by 35%, besides giving it access to ComViva’s 130 large customers across 90 countries. 

In 2013, Tech Mahindra also snapped up group company Mahindra Engineering for ₹720 crore, looking to strengthen its presence in the manufacturing vertical, especially engineering design. With over 1,350 employees and revenue of ₹250 crore, Mahindra Engineering had a 20% growth in revenue over the previous three years and margins of over 26%, making it an attractive target. Even better, it gave Tech Mahindra access to marquee clients such as Honda, GM, Audi, Daimler and Aston Martin. “Most of their acquisitions have worked well for them. They have been able to acquire capabilities or strengthen their position in existing verticals rather than chasing revenue numbers,” says Ashish Chopra, analyst, Motilal Oswal Securities. “For instance, ComViva and MES strengthen their position in mobility and engineering. BASF strengthens their presence in Germany and the Hutchison deal helped them earned a larger wallet share of the client.”     

The road ahead

What’s working in Tech Mahindra’s favour is the changing tech landscape, where with the advent of smartphones and tablets, firms are looking at mobility as one part of the core IT solutions. “As we become a more a connected world, mobility solutions will take centrestage, both in consumer and enterprise technology, and we will be best placed to take advantage of the increasing opportunities in this space, given our expertise in telecom.” says Gurnani. The firm is looking to leverage its communications and networking expertise to offer bundled service offerings to its enterprise clients in the networking, mobility, analytics, security and social media space. “The marketplace is changing and our traditional offerings are not going to stand ground beyond the next five years. So, as an organisation, you need to capture the new trends and build services around them,” adds Thalapalli. As a first step, the company, in partnership with Texas Instruments, has set up a lab at Bengaluru to create innovative solutions based on the internet of things in the healthcare, manufacturing and automotive space.

But even as new opportunities arise, there are some concerns on Tech Mahindra’s largest client in the telecom business scaling down. BT contributes almost a third of Tech Mahindra’s $1 billion telecom practice (incidentally, this is the largest in the business). “While the size of the wallet that BT is outsourcing has been shrinking, we still get the largest chunk of their business. Rebidding contracts is the normal course of our business and I wouldn’t worry too much,” says Gurnani. The reason he is not too worried is because the non-BT revenue in telecom has been growing at a healthy clip of 36% as Tech Mahindra has emerged one of the preferred IT vendors for most leading telcos, including AT&T and Verizon in the US. While a revival in telecom spending may not be on the cards, the company is likely to gain market share at the expense of other offshore vendors, given its deep domain expertise. “In a sector such as telecom, where IT spends haven’t increased much, Tech Mahindra has been grow faster than its peers,” says Chopra.

On a winning spree

Tech Mahindra's service offerings and sales investments are paying off

Sudin Apte, CEO, Offshore Insights, an IT outsourcing advisory firm, believes the depth of the company’s domain capabilities in other verticals such as BFSI and healthcare is limited compared with companies such as TCS and Cognizant. “Tech Mahindra does not have deep transformation skills in application development and business process management that a TCS and Cognizant has,” he says.  

The management hopes to bridge some of this gap through possible acquisitions in this space. While Apte believes that catching up with the tier 1 firms will be difficult even at the current growth rate, Tech Mahindra should be able to sustain its growth momentum. “The management is hungry for growth and willing to take risks. They have been innovative in both client conversion and pricing and that should help them sustain their deal momentum.” he says. 

Analysts expect Tech Mahindra’s growth to be ahead of most other players in the industry, possibly next only to TCS and HCL Technologies, in the next two years. While it may take a quarter or two more to get to the $5 billion target even with the help of acquisitions, the company has emerged as a formidable alternative to tier 1 players. “Tech Mahindra is the go-to-vendor in the industry as far as the telecom and manufacturing verticals are concerned. In some of the larger deals, clients have preferred to go with them over some tier 1 players and that is a comfortable position to be in,” says Chopra. Most of the acquisitions have been at attractive valuation at 0.9 times price to sales (except for Mahindra Engineering Services). 

Back in 2009, not many would have given Satyam a chance, but Tech Mahindra managed to resurrect its fortunes. “Five years down the line, it is heartening to see we made the right decision going with Tech Mahindra,” says former Nasscom chairman Kiran Karnik, who was part of the Satyam board appointed by the government. “It was not about going with the highest bids but finding the right company, which could not only turn around the operations but also had the best interest of the employees in mind, and the entire team was committed to that.” That being the case, Gurnani and team will soon have reason to uncork the bubbly when they hit $5 billion mark.

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