Technology will drive the economic recovery – Tech Mahindra

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Technology will drive the economic recovery: Tech Mahindra CEO
Edited excerpts of an interview with Mr. C P Gurnani, Chief Executive Officer, Tech Mahindra with Economic Times dated 7th July, 2020:

Need for digitalisation is on a high and so it is still advantage Indian IT industry.
Manufacturing, travel, logistics, hospitality are some of the sectors re-inventing themselves to be future ready and we are helping our clients to cope with the post Covid world., says CP Gurnani, CEO, Tech Mahindra

• When asked about his views on future of IT companies, he said that most of the Tech M family have remained safe and healthy, the pandemic have impacted few lives and locations. The command and control centre of the company is constantly monitoring the wellbeing of the employees.
• His comments on IT sector’s performance as compared to the month of Mar-20, now that the Pharma, financial and telecom sectors have normalized: He believes that here will be two quarters of stress and if the second wave is not that strong and till the time a vaccine is not discovered, overall global IT spend will come up. Technology will drive the economic recovery and the way consumption is done. So he remains optimistic but at the same time conscious that manufacturing sector, travel, logistics, hospitality are some of the sectors which are re-inventing themselves to be future ready ad Tech M is helping their clients to cope up with the post Covid world.
• When asked about IT budgets and client engagement he informed that they are all seeing increased demand from sectors like telecom, healthcare, pharmaceuticals, media and entertainment and e-education. So that is the positive side. The second positive side is the growth of the digital economy. The need for digitalisation has become equally important for the corner shops or the grocery shops. People now want to participate in the digital economy, even the retail sector. The stress is only for offline, the online retail sector is doing well. So technology and online services are playing a critical role during the lockdown and in a lot of ways, the feeling of optimism is relative and the relative part is where we will continue to see demand.
• When asked about his views on telecom sector and whether it is now going to be the driving vertical because globally spend in telecom and data is only going to intensify, is Tech M in a position to capitalise on it, Where does he see the telecom business moving for Tech Mahindra, he answered that a lot will depend on the next quarter results because all of us understand that the new age technologies like 5G, AI, machine learning, data analytics, Cloud, automation will be the drivers for change in growth for the telecom businesses. How we translate it into revenue will depend upon how these organisations respond to economic development or in certain cases, a little bit of a slowdown in the economy. He also requested to remember that at this stage the stimulus money has kicked in. The US is about 17-18% deficit, India would be about 7-8% deficit. If we follow the money and look at the digital requirements, there is business to be had but a lot depends on how the world responds over the next two quarters.
• When asked about the reason why market is not rewarding Tech M with best PE multiple and lower margins, he stated that the Board has asked for a plan which addresses three parts to what Tech Mahindra will do. Number one is the industry mix. Number two is geography mix. One of the biggest challenges, which is an advantage as well as a disadvantage is that US business is only 45-48%, the rest of the world is 55%. That has effectively meant the energies which have gone into operating in Latin America or operating in Africa could have been better used. Tech M is now working on a plan focusing on: a) geographic reach, b)service offerings and c)some of their big bets like 5G have been relatively slow but he committed to the board that we do understand the challenges. We are going to follow the path of differentiated connected solutions strategy at the same time, we need to do a better job of choosing a few of the geographies particularly where because of the local labour policies, it becomes very difficult to operate profitably. So we are conscious of the need for turnaround or transformation. We are very clear and know the direction, now we need to bring in the speed.
• When asked whether the Covid crisis have pushed the plans forward by 6 or 12 months, he replied that he will attend the financial analysts meet himself in November-20 and would give definitive answers. Till that time, because of the uncertainty called Covid he would want to reserve his comments but the strategy, direction and speed — all three are high on his radar.
• His views on work from home: Today, 93% people are working from home. About 6% to 7% go to work which is also because there are clients in Australia, Philippines, some in the US, who have restrictive and more stringent policies. So till December, the ratios are not going to dramatically change. Most of the clients have accepted that work from home is the reality. The positive outcome to all of this is that most of us are now becoming a lot more conscious about data security, cyber security and making sure that we use and equipment which are part of the Tech Mahindra ecosystem. The last thing you want is risks off too much of distributed processing. So 25% to 30% work from home is a given in the future. People like him would still go to office because some people like to interact with people, to have some cooler talk, go to the canteen and ask people for feedbacks and listen to them. Similarly, he would like to visit his customers. So, he thinks about 25% to 30% at any given point of time will be work from home. About two days in a week, people would like to come back to work. The structured interactions, the whole human machine technology refresh will happen in those two days a week. It is interesting times, but the new normal is here to stay.
• When asked about the cost structure and any chances of cost reduction due to work from home he said that in a lot of ways most of Indian IT companies despite being a $181 bn business had stopped investing a lot on campuses. The reason was that most of the growth was coming which was non-linear growth. Number two, it is also evident that if 25% of the workforce is common for everybody, then we do not need commercial space for a long time.The third part is it is not that the employee cost or the infrastructure cost will come down dramatically. Wewill have to start providing some level of allowances which compensate because people are not spending their time and energy from coming to the workplace. In balance, it is a good thing for the industry. It is a great thing for the gig economy, it is almost a wonderful thing for a flexible workforce and it is a wonderful thing for adoption of AI and machine learning.
• His outlook on India specific business for IT companies as no Indian IT company gets even 10% of the business from India : Most of us are hesitant about India business. Nasscom has been trying to persuade various government departments on the payment terms. Unfortunately, what has happened is that IT buying is almost like they used to buy hardware where the manpower cost was probably 6% or 7%. Today the manpower cost in any IT project is 60% to 70%. So, in payment terms and the way acceptance of the solution is addressed, the Indian government has not adopted itself to the new normal. We have seen it in the last two-three years that the Indian IT spending may have gone up, but the players which are participating, have only got very limited. India Inc has to spend more on IT needs. It has to realize the need for cloud, need for cyber security is very high and at the same time it has to take into account that whether we like it or not, employee payroll has to be delivered every month and you cannot have a situation where an employee works for a project and get paid after a year.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of Tech M was ₹ 582/- as of 08-Jul-20. It traded at 14x/12x the consensus EPS estimate of ₹ 40.8/50.3 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 647/- implies a PE multiple of 12.9x on FY22E EPS of ₹ 50.8

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