Tech Mahindra Ltd

NSE:TECHM

Q1-2026 Earnings Call

[Operator]

Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q1 FY '26 Earnings Conference Call. We have with us today Mr. Mohit Joshi, Chief Executive Officer and Managing Director, Tech Mahindra; and Mr. Rohit Anand, Chief Financial Officer, Tech Mahindra. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Mohit Joshi, MD and CEO for Tech Mahindra. Thank you, and over to you, sir.

[Mohit Joshi, executive]

Thank you. Good morning, good evening, and thank you all for joining us. [Audio Gap] that Q1 reflects progress aligned with our stated plans. While the environment remains dynamic and uncertain, our continued execution is building confidence that we are on the right path.

For the quarter, we reported revenues of $1,564 million, reflecting a 0.4% growth year-on-year and a 1% decline on a constant currency basis. The performance was driven by growth in the communications, retail and BFSI verticals. The year-on-year headwinds were primarily due to our field service business, which we are rightsizing. We also saw spend reductions in the automotive sector, which impacted year-on-year revenue performance.

Importantly, this marks our seventh consecutive quarter of margin expansion. This is a significant milestone and speaks of the rigor of our operating model and our continued focus on cost efficiency and the quality of our revenue mix.

Let me now delve deeper into our performance. Our communications vertical posted a year-on-year growth of 2.5% on a reported basis, supported by stabilization in spending in our top clients. Looking ahead, our strategy is to leverage the strength of our long-standing relationships with global communication service providers and leverage our unique capabilities in IT, networks and the Comviva software suite.

We have a unique right to win in this vertical and are actively investing to scale our capabilities in digital platforms, API monetization and vertical-specific services to create adjacent revenue opportunities.

The manufacturing vertical declined by 4%, impacted by softness in discretionary spend within the automotive segment. To elevate our growth position in this vertical, we continue to engage closely with key manufacturing clients. And our manufacturing experience center, which was inaugurated in January this year, has already hosted over 60 client visits. It is becoming a true showcase of our manufacturing capability, innovative mindset and our distinctively experienced staff.

Our BFSI vertical reported a year-on-year growth of 4.7% and continues to be one of our fastest-growing verticals. The marquee Fortune 500 and Global 2000 customers in financial services and insurance have engaged with us, enabled by our key differentiation in asset and wealth management, payments and core capabilities in platforms like Guidewire and Temenos. We remain confident about our long-term potential in this vertical across all of our geographies.

Our high-tech vertical declined by 3.3% on a year-on-year basis on a reported basis. The decline was driven by ongoing restructuring in the semiconductor industry, including steep budget cuts and workforce rationalization at a key client. While these headwinds are playing out, we are strengthening our capabilities in silicon design, embedded systems and digital product engineering. Our client engagement remains strong and anticipates a gradual recovery in the second half of the year.

On a year-on-year basis, Americas declined by 5.9%, Europe grew by 11.7%, and the rest of the world increased by 2.9% with both regions aided by favorable currency tailwinds. In our client metrics, we have added 2 clients in the $50 million bucket over last year. This clearly demonstrates our ability to scale engagements and deepen relationships within key accounts.

On large deals, TCV for the quarter stood at $809 million, a 44% increase year-on-year on an LTM basis. Our centralized solutions team and contract management group have yielded positive results, particularly in securing multi-tier high-value deals. Additionally, large deals over $25 million now make up a higher proportion of the total TCV.

The deal wins are broad-based across comms, high-tech, BFSI and other verticals. A few of our key wins include: we were selected as a key growth partner by one of America's leading consumer wireless operators for its customer operations transformation. The designation as a growth partner unlocks the doors to all future opportunities as per the client's new sourcing strategy.

We were engaged by a leading global high-tech company to help them deliver truly immersive user experience powered by their LLM platform. TechM will ensure enriched experience for more than 2 billion users while ensuring the platform remains safe and secure.

TechM was chosen as the prime partner with a leading U.K.-based telco for a multiservice line deal to deliver and manage applications across its fixed and mobile networks. The scope includes delivering services across application services, network services, next-gen engineering and digital enterprise applications.

We were engaged by a railroad customer in the Americas for the development and support of a portfolio of applications across multiple corporate functions of the company and across multiple technologies including SAP, Salesforce and data analytics.

We were selected by a leading global fashion apparel brand for a multiyear strategic engagement to provide digital and data transformation and support services. The scope includes SAP fashion, cloud and data and AI, digital commerce platforms with a dedicated global capability center, or GCC, to drive innovation, cost efficiency and business agility.

Overall, for our financial progress, we are beginning to see early results of the structural changes and the strategic choices we have made. Our deal wins momentum remains strong, and we expect this to strengthen, reflecting in our growth in the next quarter. In sum, our margin trajectory is steadily strengthening and we are confident in our ability to build revenue momentum.

One of the key differentiators in our transformation journey is our formidable team. Let me highlight some important developments on the talent front. Amol Phadke has joined us as Chief Transformation Officer and will be extending our progress with go-to-market initiatives. He brings over 25 years of experience in technology and business leadership in areas such as AI, cloud, software networks and IT in firms like Google, Telenor and BT.

Additionally, we have seen the internal elevation of leaders into key roles, including the Head of our Telecom business in the Americas and the Head of our India, Middle East and Africa business. These appointments underscore our strong internal talent bench and reflect our ongoing commitment to building a high-performance organization.

We continue to focus on leadership development, succession planning and creating a culture of accountability. Our people remain at the heart of our transformation story. During the quarter, we launched TechM [ Zenith ], our flagship leadership development program, in partnership with INSEAD.

Our AI-delivered [ right ] strategy, which we unveiled last quarter, has been resonating well with our clients. Our value lies in helping clients transition from proof of concept to production, from the sandbox to production systems. The strategy is being executed on four foundational pillars: transformation delivered, productivity delivered, innovation delivered and assurance delivered. These pillars are also contributing meaningfully to our AI deal wins.

We now have a portfolio of 200-plus enterprise-grade AI agents across industry segments, several of these already in use at scale with our clients. Our agentic AI offerings also include a hybrid human and agent workforce. TechM's AI consulting practice enable clients to validate ROI and prioritize AI use cases in a systematic and efficient manner as we evaluate their AI roadmap.

TechM is well positioned to support clients effectively, enabled by a more experienced workforce that serves as a strong enabler and key differentiator for the offering. Our 77,000 plus employees across the company are trained in AI and Gen AI, including a critical mass with advanced training and certifications.

We hosted our first ever Innovation Day, InnoVerse 2025 during the quarter. This is an internal platform to showcase and strengthen our innovation culture. We brought together teams to solve real-world challenges with speed, scale and creativity. It reaffirms that innovation is a core component of our DNA.

We organized TechM Synergy '25, our partner appreciation event this month in London at the legendary Arsenal Stadium. It was great to connect with over 125-plus partners and clients. This year's theme, Winning Together with AI, captured our shared ambition and showcased our AI-driven leadership. It also laid the groundwork for collaborative frameworks that will shape the future of our partnerships.

We also strengthened our ecosystem this quarter through key partnerships. Let me highlight a few notable partnerships this quarter.

A partnership with Nuix, a global leader in AI-powered investigative analytics and intelligence software, to provide innovative scalable solutions for cyber and fraud detection; a partnership with ServiceNow to deliver next-gen broadband solutions tailored for CSPs, offering a comprehensive vertical solution stack; the launch of a new managed service offering for Cisco Multicloud Defense, a component of Cisco's Hybrid Mesh Firewall. The new offering provides enterprises a robust cloud security solution.

On the awards front, we are proud to share that we have been included as a constituent of the FTSE4Good Index for the ninth consecutive year. Our performance was rigorously evaluated in key areas, including corporate governance, health and safety, anticorruption and climate change. This independent assessment is a testament to our leadership in implementing robust governance practices and upholding high ESG standards.

We were recognized as one of the Best Organizations to Work For and as one of The Most Innovative Organizations by ET NOW. These recognitions underscore the investments we have made in culture innovation, corporate governance and capability building.

In June, I completed my 2 years with Tech Mahindra, and I deeply value the warmth, energy and openness that define our culture. It is what has made and what makes this journey so meaningful. We look to retain the essence of this culture while driving continuous improvement across the organization.

Many of the improvements we are driving may seem small in isolation in systems, in processes and ways of working and in driving focus and operating discipline. As the theory of marginal gains teaches us, consistent progress across multiple fronts will generate transformational outcomes. We are beginning to see this play out. And we are confident this momentum will compound meaningfully in the quarters ahead.

With that, I'll now hand over to Rohit, who will take you through our financial performance in more detail.

[Rohit Anand, executive]

Thank you, Mohit. Good morning, good evening, everyone, and thank you all for joining. Let me start by walking you through the company's financials for the first quarter of FY '26 covering the period June 30.

We ended the quarter with revenue of USD 1,564 million compared to USD 1,549 million last quarter. On a reported basis, revenue grew by 1% sequentially and 0.5% on a Y-o-Y basis. However, in constant currency terms, we recorded a sequential decline of 1.4% on a Q-o-Q basis and a decline of 1% on a Y-o-Y basis.

From an INR perspective, revenue stood at INR 13,351 crores compared to INR 13,384 crores in the previous quarter, a decline of 0.2% on a sequential basis on account of INR depreciation against the U.S. dollar and 2.7% growth on a Y-o-Y basis. Our EBIT dollars grew by 30% in USD terms and 34% in INR terms on a Y-o-Y basis. EBIT margin was at 11.1% versus 10.5% last quarter.

Headwinds during the quarter on margin included the seasonality that we see in the Comviva business, the higher visa cost and lower utilization. These were offset by savings from Project Fortius, operational levers such as favorable offshore mix, G&A optimization, including continued progress made on the integration of portfolio companies and other levers contributing to cost efficiencies.

Our effective tax rate for the quarter came in at 30%. And as you must recall the previous quarter, we had onetime refund, which got normalized this time. We expect that tax rate as stated before, to be in the range of 27% for FY '26.

Our profit after tax for the quarter was $133 million, a Y-o-Y increase of 30%. In INR terms, PAT is at INR 1,141 crores with a PAT margin of 8.5%, an expansion of 200 basis points on a Y-O-Y basis.

Our return on capital employed stood at 23.8% for the quarter, reflecting a sequential improvement of 120 basis points. On a Y-o-Y basis, ROCE improved by 600 basis points, driven by enhanced profitability and disciplined capital allocation. We remain focused on sustaining capital efficiency as we work towards our stated F '27 target.

We generated $86 million of free cash flow during the quarter, which is lower, reflecting the usual seasonality that we see in the first quarter of the financial year. This was impacted by an increase in DSO, primarily driven by certain timing-related collection delays, which we see to get normalized towards the next quarter.

Our hedge book for June 30 stood at $1.64 billion compared to $1.96 billion in the previous quarter. We've adopted a more prudent approach, particularly with respect to entering long-term hedges, reflecting the current volatility in the global currency market. Based on hedge accounting, our mark-to-market loss for the quarter was $9.3 million, out of which $3.9 million was taken to the P&L and $5.4 million went to reserves.

Our total deal wins for the quarter stood at $809 million, reflecting a growth of 44% on an LTM basis. As Mohit highlighted earlier, we continue to improve our deal win ratio, which is a testament to the trust our clients place in us and the relevance of our value proposition. More importantly, these wins are broad-based and across multiple verticals.

We made a good progress over the past few quarters as a part of our margin improvement program. This is driven by a resolute operation strategy, focus on profitable growth and disciplined execution. As we shared during our last quarterly update, we remain on track to achieve the margin improvement in line with our stated F '27 target.

With this, I now hand it back to the operator for Q&A segment.

[Operator]

[Operator Instructions] Our first question comes from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, analyst]

The first question is on your demand environment you're seeing. Have you seen any signs of weakness over the course of the quarter because of trade deals or uncertainty there, number one?

Number two, related question is signing momentum has improved in the last couple of quarters, but we haven't seen revenue momentum improves yet. Any comments in terms of when you see that improving?

[Mohit Joshi, executive]

Thanks, Ankur. Thanks for the question. So look, on the demand momentum, first of all, it's a little bit of a mixed picture, right? As we had shared previously as well, we have seen a slowdown in the auto sector and in manufacturing more broadly, an industry that has been impacted the most from a tariff perspective. And there, we have seen a cutback in discretionary spending by our clients.

We've also seen some slowdown in the high-tech vertical. This is largely because I feel that high-tech clients react very quickly to downturns or to risks from a recession perspective. And we had, I would say, a client-specific issue from a semiconductor perspective, where semi clients, this one in specific, had a fairly sharp cuts both in terms of full-time employees as well as from a discretionary spend perspective, right?

Apart from that, we have not seen a significant change in demand momentum across the board. Telco has actually stabilized, as you've seen this quarter, and grown this quarter. No significant changes to report from either a BFSI perspective or elsewhere. So that's the demand environment, weaker in manufacturing and high tech, I would say.

From a large deal perspective, you're right that we have over the past 3 or 4 quarters, continued to show a steady increase in our large deal booking rates. But at the same time, we've also had to deal with a tougher macro and some runoffs that we were -- that we have been grappling with.

We do expect that from the Q2 onwards and certainty from the second half onwards that the large deal wins will have completed transition and will start accruing to revenue, provided that the business environment remains at the current level, right? So you would expect them to start accruing to revenue from the current quarter onwards, given no fresh surprises.

I hope that answers your question.

[Ankur Rudra, analyst]

It does. Just a follow-up, if I can. You highlighted demand environment has been a bit mixed overall. Some of your peers have highlighted demand environment is not particularly strong, and we have seen some unexpected margin weakness in your peers as well.

Do you think it's tougher for you to meet your margin and growth aspiration targets for both fiscal '26 and '27 in light of this? It makes it tougher to achieve the same target you set in a period where environment might have been better?

[Mohit Joshi, executive]

So I think it's a fair question. And as we've shared, when we originally made the plans for FY '27, the expectation was that FY '26 would see a return to normality from a growth perspective, right? We knew that FY '25 would be weak because we had set the plans at the start of FY '25. But we expected to come back to maybe slightly muted growth, but close to industry average growth in FY '26 and a return to standard industry growth rates in FY '27, right? That promise has not been met.

Having said that, we are still holding on to our margin commitments for FY '27. I think one of the key things is that we have been very, very, I would say, prudent or cautious in terms of our large deal sort of structure, very prudent from a contracting perspective and also prudent from a pricing perspective and not wanting to sort of win revenue at any price. I think that has stood us in good stead in this environment compared to our peers, who may have been too aggressive.

[Operator]

Our next question comes from the line of Sudheer [ G.V ] from Kotak Mahindra AMC.

[Unknown Analyst]

First question is on telecom. So you mentioned signs of stabilization in demand in telecom. So are you also referring to the U.S. telcos, North American telcos? Or is it just the ROW and Europe telcos, which is where you called out stabilization in the earlier quarters as well?

[Mohit Joshi, executive]

Sure. So let me actually give you a more sort of granular picture. From a APJ perspective, right, we have seen stabilization and steady growth from a telco perspective. From a India, Middle East and Africa perspective, there is a lot more volatility than we have seen, but we have now got new leadership in place.

We've also reorganized our India, Middle East and Africa business, which historically used to be a geographically structured business into our standard global vertical model. So going forward, that should help in growth and relevance in that market.

From a Europe perspective, we are seeing a very significant pipeline from a consolidation perspective, right? There is consolidation in the market overall in terms of the reduction in the number of telcos, but we are also seeing a consolidation of IT services providers and BPO providers for each of our clients. So that, I feel, does present us with an opportunity in that market.

Also from a Comviva perspective, we have made significant breakthroughs from our Comviva software suite perspective in Europe. And I think that combination of software and services in that market gives me a lot of hope from a long-term perspective, again, because these are consolidation opportunities, and I'm hopeful that we'll be on the winning side of these consolidations. That should give us a boost in the future if we win these deals, right?

The Americas, as you know, historically has been a challenge for us because we did see sharp reductions in spend from our largest clients. We feel that, that level of spend has now stabilized. And we should be looking back -- we should be coming back to growth in that market. But again, as of now, I would just say that we are seeing a level of stabilization. So that's a sort of broader global region-by-region picture for you.

[Unknown Analyst]

Very insightful. The second question is on U.S. geography. Surprisingly, you have seen a decent growth of around 2.6% sequentially in U.S. in contrast to the trade-related tensions and the decline supported by some of your peers. So what is driving -- on a sequential basis, what has driven this growth in U.S. market?

[Mohit Joshi, executive]

Sorry, just give me 1 minute as I fill out the year-on-year numbers. So look, I think the growth in the Americas has largely been driven by our strong performance in the telco and the communications vertical. I think the more relevant number is really the year-on-year number, right? And year-on-year, the slowdown that we've seen in manufacturing has really impacted us in that market. Even though the quarter-on-quarter is showing a positive, largely driven by the strength in the communications business in the region.

[Unknown Analyst]

Sure. And your commentary seems to suggest that the momentum will only strengthen going ahead, both on growth and deal wins. So what gives you that confidence, despite the fact that macro is still a bit on the shaky ground and we have not necessarily reached a conclusion on the tariff front?

[Mohit Joshi, executive]

So if you look at the expectations that we have set for ourselves for FY '27, we have said that we will be higher than our peer group average in terms of growth and that we will hit a certain margin target.

I would think that all the work that has happened, which is why I spoke about the changes that we've done, the macro improvement that we've driven in the company, all of these, right, whether it's a focus on key clients, focus on opening must-have accounts, the focus from a service line perspective, the vertical alignment that we have driven within our geographies, the new talent that we've added, right; I think all of this gives us significant additional strength.

And we are seeing -- we always knew that we had headroom for growth in our top clients. We have now started to realize the promise of that headroom for growth. And I feel that puts us in a good position from a future perspective.

So it's a combination. It's not just one thing, it's not one silver bullet, it's a combination of all the things that we have done over the past 1.5 years that I think are now starting to bear fruit.

[Operator]

[Operator Instructions] Our next question comes from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Yes. Congrats on good execution, especially on margins. Just, Mohit, in terms of earlier reply, you said this year, we may be at an industry average growth. So if I just do the math, it looks like for closure to around 2% to 3% growth in a constant currency, a 1% to 2% kind of a growth, we may require 2% to 3% compounded Q-on-Q growth in the next 3 quarters.

So are we believing this kind of a momentum may start immediately? Or it's based on some hope and converting pipeline into deal wins and it could be back-ended growth?

[Mohit Joshi, executive]

No, it's not based on hope, Sandeep. So look, I think what we said -- what I said was that we will be higher than our peer average from an FY '27 perspective, right? So if you -- as you will doubtless remember the 3-year plan that we shared, the first year was really the first year of the turnaround. The second year is the year when we would start to bridge that historical growth gap that we've had with our peers. And the third year was when we would bridge the average, right?

So this is very much a year of bridging the growth gap with our peers rather than overtaking our peers in this year. Obviously, we hope we can do it, but that's certainly not what we have promised or committed.

[Sandeep Shah, analyst]

Okay, okay. So Mohit, do you expect this year could be a positive growth or flattish growth? I agree we don't give a guidance. But are we aspiring to have a positive growth?

[Mohit Joshi, executive]

Well, I think like what we had said at the start of the year, Sandeep, is that we expect FY '26 will be better than FY '25. And that is the extent of the commitment we've given, right?

As you understand, there's an extremely volatile situation. The consensus estimate for the whole peer group have seen a huge, huge divergence from the time when we had met even last quarter, right? So it's very hard in this volatility to give an exact number, but we do expect it to be better than FY '25 from a Tech Mahindra perspective.

[Sandeep Shah, analyst]

Okay. Fair enough. And last question, in terms of margin improvement further going ahead, what are the levers we are banking upon? And is it fair to assume we may also give a wage hike for FY '26 in the coming quarters? So just wanted to understand the target of achieving a 15% margin is more dependent in terms of revenue growth pickup or still we have levers to cut the flab and improve the margins?

[Rohit Anand, executive]

Yes. Sandeep, this is Rohit. I think two things, right, from -- first, maybe I'll address the wage increases. As you know, we just had the wage increase last quarter for the organization. So cycle is going to be more January calendar year next year, last quarter of the financial year. And it's subject to how the market pans out in this next 6 to 9 months. It is subject to that. So I think we have some time to make that decision.

In terms of margin, as we said, so first is the growth correlation, right, to your question. I think on growth, as Mohit articulated well that our historical gap to peers in organic growth was more than 4% to 5%, right? And we've narrowed that in F '25. We'll continue to narrow that in F '26 and then exceed the peer average '27.

So our plan on margin is based on that growth theory, right -- growth plans, right, that we have articulated. So in that context, we are pretty well grounded.

Now if the growth situation turns out worse than that based on the macro, then of course, there will be a relook at that plan. But if that assumption comes through, which is very realistic, given where we are; I think we should be able to get to our margin guidance, right, for F '27.

In terms of levers, as I mentioned before, right, from our perspective, the levers are similar last quarter. We've given a walk. Over the last 12 months, when we improved margin, a lot of improvement have gone in subcontracting cost, a lot of improvements gone on continuous offshoring fixed-price programs that we improved and further integration that we started a portfolio company.

We've also tightened our governance on contractual reviews that we mentioned on new as well as existing deals, right? So those are all part of improvements that we've driven.

Now when you look forward, I would say that our improvement levers remain the same. I think one of the big portion of the improvement levers will be driving productivity actions around the fixed-price program, right? We continue to drive improvements there and improving -- right now, gap on that versus the entitlement is significant.

And we feel we have a lot of headroom to get better there, both on improving execution and driving various levers on some price to governance to improve offshoring and productivity tools that we have lined for ourselves.

And that's what we invested, right? We've clearly articulated, we'll invest in growth and margin actions in year 1 and year 2. And those are the investments that we're pretty confident will help us expand margin as we move forward.

The other big area of the bucket is integration of the portfolio companies, which we've started the journey last year. We did the front end and delivery integration. That's all done. I think we're now progressing on the support or the functional integration, which will continue to give us improvements through now until F '27 as we complete that process.

[Sandeep Shah, analyst]

Okay. And just to follow-up to this as a bookkeeping, the sales and support staff has declined materially both on Q-on-Q and Y-o-Y. Is it also to what you said, are we rationalizing sales and support in acquired subsidiaries?

[Rohit Anand, executive]

Yes. So I think sales is relatively lesser. It's more support. I think as we look at support, the functional costs, right, we've clearly articulated 2 or 3 plans, right? We're integrating everything on SAP platform. We are centralizing support COE structures, right, on shared services.

So it's a functional cost out based on all those efforts that we're driving, which is yielding a reduction there. There's less so much in sales. Sales is more driven by performance management that we'll continue to drive, but not like a significant net reduction.

[Mohit Joshi, executive]

If I can just expand on that a little bit. See, the way the company was structured historically is you had sales and delivery, you had almost like 14 different teams, right? So you had sales teams, and they who used to run their own delivery organizations. Now we have one consolidated delivery organization under the Chief Operating Officer, and the sales teams are organized by vertical.

So that dramatically -- because we have one centralized global delivery organization, that dramatically reduces the need to have complex orchestration, right? So that is, I would say, the single biggest lever that we have used to cut down on the sales support piece. We are absolutely very focused on sales, so there is no intention of reducing sales headcount.

Indeed, if we have seen over the past couple of quarters, with the senior level hires that we have announced in the markets, it is very much to drive revenue momentum and sales momentum and greater thought leadership closer to our customers.

[Operator]

Our next question comes from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Mohit, just to delve a bit deeper into the uncertainty that you mentioned about especially in the manufacturing and the auto vertical, I mean, we've seen this uncertainty impacting us. The 9th July deadline has come and gone by. Now we are looking at the August 1 deadline.

So in your recent conversations with the client, have you seen a further deterioration of the overall environment and uncertainty increasing and clients to holding back their spend? Or do you believe it is pretty much the same as we were when we spoke in April?

[Mohit Joshi, executive]

Yes. So I think, look, candidly nobody knows from one day to the other what the -- how the tariff impacts may play out. I think there are a couple of things from our perspective that are important.

One is that our manufacturing, specifically our auto exposure, is much larger in the U.S. market, right, as opposed to European market. So we are shielded to that degree. Our significant auto exposure in Europe is only through Pininfarina, which is a specialist sort of manufacturer there, right?

I would say that there hasn't really been any sort of clarity. Obviously, with more time, clients have developed their own plans maybe in more detail. I think the picture around the USMCA, for sure, it's clearer. And a lot of the American manufacturers, for instance, are much more dependent on Canada and Mexico than they are on European manufacturing.

So to that degree, I would say the picture has improved, but it's still not very clear, right? It's still not -- I would say it's not a whole lot clearer than it was in April.

[Vibhor Singhal, analyst]

Got it, got it. Yes, sure. I think that's the commentary that we're hearing from other guys as well. Just a couple of quick clarifications. Our headcount in BPO continues to increase. I think this quarter also we saw a Q-on-Q increase in the headcount.

Any color on that, that you can provide? I think we've all been hearing about a lot of Gen AI impacting BPO users, but this headcount addition signals otherwise. So any color that you can give on how we are looking at the BPO business? And do we expect that to continue to basically grow in light of the -- even despite the impact of the Gen AI rollouts?

[Mohit Joshi, executive]

I think a couple of things. One is the BPO business has a degree of seasonality to it, right? So it is partly that. And partly it is to plan for expected ramp-ups because of deal wins.

I would just caution though that in BPO, ramp-ups and ramp-downs are quite reasonable because the contract durations sometimes are smaller. Sometimes the -- a lot of the programs are linked to fixed outcomes that we have to deliver. So I really wouldn't read too much into it. But the current headcount additions largely have to do with -- partly with seasonality and partly to meet expected ramp-ups in the current quarter.

[Vibhor Singhal, analyst]

Got it, got it. And just one last question from my side. The offshore percentage is quite -- I mean, has increased very smartly over the last 1 year. We've increased by 30 -- 300 basis points to around 17.5% now. Do you think we are getting closer to maybe getting that as a ceiling and there will be very little room to expand it further? Or do you think there's still some juice left on that metric?

[Mohit Joshi, executive]

Well, I would really ask Atul, who is our Chief Operating Officer, to weigh on it.

[Atul Soneja, executive]

Yes. Thanks, Mohit. So I think we have made some progress in terms of moving projects offshore wherever it makes sense for us, along with our clients are buying into it. So I think we don't have a fixed percentage that we want to go towards. It basis -- it's obviously aligned towards what kind of engagements we are doing with our customers.

And as we start ramping up towards some of the deal wins that Mohit was alluding to earlier, we might see a temporary shift of some of the on-site numbers going up as well. But I think on a progressive basis, you will see that we are continuously hovering around the same mark and improving from where we are.

[Operator]

Our next question comes from the line of Rod Bourgeois from DeepDive Equity Research.

[Rod Bourgeois, analyst]

So Mohit, it's encouraging that you guys are showing continuing steady progress on margins towards your fiscal '27 target. So I want to ask more about your path towards improving Tech Mahindra's growth position.

Specifically, are there tangible leading indicators that suggest that your growth position is going to be on the rise? It would be great if you could specify any main leading indicator that's making you do the revenue momentum that you mentioned in your comments.

[Mohit Joshi, executive]

Sure, Rod. Thank you for that. So I would, maybe on the top of my head, point to three areas, right, where -- which are part of our strategy and where we are seeing tangible outcomes.

The first has to do with the fact that last year, when we articulated our strategy, we very clearly said that we want to drive a much deeper focus on our largest clients, right? So we had a specific program called Turbocharge that looked at our peak and prime accounts. These are the accounts that really give us the bulk of our revenue.

And as we had shared previous quarter, and this is a statistic that we'll be sharing on an annual basis, we are seeing faster than company average growth for our top account set, which for me is a very positive sign.

Our largest clients have a significant amount of headroom for us to grow because these are typically Fortune 500 and Global 2000 customers. And even in the most recent quarter, we have seen a significantly faster growth rate from our largest accounts than from the company average, right?

So that's the first part of the strategy, which is working. Largest accounts is growing faster than the company average.

The second piece has to do with our focus on adding the sort of customers who we want to do business with in the future, which is the must-have accounts, right? So in the current quarter itself, for instance, we added 15 new must-have accounts. These are typically Global 2000, Fortune 500 accounts. And I feel that the addition of these clients to our roster will again enable significant growth because once we have permission to hunt and permission to be a partner for these customers, I believe opportunities will open up.

So this is the second part of our strategy, which is focus on the strongest players and the largest players in the industry segment.

The third part of our strategy was about making sure that we focus on profitable large deals, right? And again, as you have seen over the past couple of quarters, we've shown a steady increase in large deal volume. These are all net new large deals only. And as I said, we expect the revenue impact from these deals to kick in.

So three things I would say, focus on top accounts, must-have account acquisition and large deals. All three levers that we've identified in April, I believe are starting to kick in. All of this is obviously sort of undergirded by a very strong delivery organization from an IT perspective and from a BPS perspective and the increased strength that we are building from a vertical perspective through focus and also through some of the new hires that we've made.

So the competitive capability is being buttressed by the verticalization and the industrialization of our IT services and our BPS offerings. I hope that answers your question, Rod.

[Operator]

Our next question comes from the line of Surendra Goyal from Citigroup.

[Surendra Goyal, analyst]

And Mohit, the last 5 quarters constant currency year-over-year growth, which obviously takes out the seasonality, is minus 1.2%, plus 1.2%, plus 1.3%, plus 0.3% and now minus 1%. So deal flow has been picking up, commentary has generally been positive.

So I'm just trying to understand, why is the revenue momentum not commensurate with that? Is there like revenue leakage, which has surprised you? Or anything else which you would want to call out?

[Mohit Joshi, executive]

Sure, Surendra. So I think there's a couple of things. One is, I think if you were to look at the earnings for our peer group also, they would look reasonably similar, maybe slightly different but reasonably similar to the trend line because we are in a very volatile environment, right? I think that's the first piece.

The second piece is that we had specifically called out the first year that we will see a significant amount of volatility in our performance, given the fact that we're on a turnaround basis, right? So we were shutting down certain businesses, we were deemphasizing certain businesses. And candidly, we were dealing runoffs from the portfolio, right, I mean, I think this is common knowledge; as well as the deep stress in the telco vertical.

Now fast forward to the current quarter, I believe that, as you've seen, the telco business has stabilized, and I believe, at least in pockets, it's poised for growth. We also believe that we have dealt with most of the runoffs, indeed, the majority of the runoffs, the known runoffs.

And so pending any further surprises or any sudden cuts in discretionary spending, we should be looking at sort of a steadier growth from here on onwards. But again, this growth will only go towards narrowing the gap with the peers and FY '27 is the year as we promised, where we expect to be higher than the group average, right?

So three-part answer. First part is not very different from the peers, given the macro. Second part is that the fact that we had clearly called out last year as the first year of the turnaround for us. And the third part of the answer is that yes, we do expect improved growth this year, pending -- just the only caveat is no new surprises.

[Surendra Goyal, analyst]

Very clear. And just one question for Rohit. Other expenses like had a meaningful reduction sequentially. So is this some kind of a new level that we should be thinking about? Or is there room for other expenses to come down further going forward?

[Rohit Anand, executive]

Yes. So Surendra, a couple of items there. One is there is obviously normalization. From a year-end spend perspective that normalizes in 1Q, so there's some seasonality around it, right, that's typically towards Q2, partially will come back. So there's some return there from an other expenses perspective.

Rest, I think, generally, I think all the actions that we're driving, right, from a Project Fortius perspective are quite sustainable for us to drive improvement as we move forward. I think there will be a certain normalization as you look forward. But that is more driven through seasonality.

[Surendra Goyal, analyst]

Understood. And just one last clarification, Rohit. The segmental margins for IT and BPO, should we be looking at that number at all? Because like IT looks to be down sequentially. So is that the way you look at it? Or we should ignore it?

[Rohit Anand, executive]

No, I think you can look at it directionally and we'll give you more nuance. But IT includes the Comviva quarter-over-quarter sequentially, right? And that flows under that number. So that's causing a predominant reasonable decline.

And then obviously, the reduction Q-o-Q, right, on a Y-o-Y -- sorry, Q-o-Q basis on revenue, it's flowing through there as well. So that's causing the utilization. You can see the utilization going down and these and other impacts, right?

So all that is factored there, which is getting offset by all the Project Fortius actions that are spread across the organization. So that's pretty much the trend that we see in IT also.

[Operator]

Our next question comes from the line of Abhishek Kumar from JM Financial Limited.

[Abhishek Kumar, analyst]

The performance of manufacturing sequentially has been very different from what was expected. And it's not just for Tech Mahindra but some of the larger peers who have reported so far. So just wanted to understand, is there some pull forward of spend that clients did and the real impact of tariff and manufacturing will show up in subsequent quarters?

[Mohit Joshi, executive]

Yes, I think that's broadly correct, right? I think the longer-term impact of tariffs would show up in the future. But also, if you look at the year-on-year numbers, right, if you look at our own year-on-year manufacturing, we're down 4%, even though we're up for the quarter. And I think what we sort of saw the slowdown in auto was for us made up by a ramp-up that we saw in the aerospace business. But I do believe that the longer-term drag is there for manufacturing.

[Abhishek Kumar, analyst]

Okay. Quick follow-up on this and then I have the second one. In the auto sector, you mentioned our exposure is largely to the U.S. market. Within the U.S. market, is it -- are we more exposed to the OEMs or to Tier 1s?

[Mohit Joshi, executive]

Largely to the OEMs.

[Abhishek Kumar, analyst]

Okay, okay. Now my second question is on high-tech. Rohit, you had mentioned last quarter that one of the BPM deals in high-tech had slipped and because of which, there was a sharp decline in high-tech. Any update on that deal? Is it back? Or are we still expecting it to come back later?

[Rohit Anand, executive]

Yes, I think it's coming back in the flow-through. So I think in Q2, you should see some of that being shown in revenue. Yes.

[Operator]

Our next question comes from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

First question was with regards to the way we've seen our subcontracting expenses come off and the relative gap that we used to have compared to peers have produced on this front. Now since you expect a lot of your new deals to essentially start ramping up, do you think we'd once again see some increase in subcontracting on a go-forward basis? That's question number one.

The second question was with regards to the point that you've been making about winning must-have accounts as well as making further inroads into some of your existing top clients. When should we start to see some of this reflect in terms of your client metrics? Because we see very limited progress across client buckets over the course of last 5 to 6 quarters.

[Mohit Joshi, executive]

Manik, can you repeat the second question? While we understood the [ subcon ], can you repeat the second question? The line was a little muffled.

[Manik Taneja, analyst]

Sure, Mohit, I'll just repeat that. My question was that we won almost 45 must-have accounts in FY '25. And even during the current quarter, Mohit has spoken about further gains over there. And you've also been talking about making further progress with regards to our existing top accounts.

So when should we see this percolate in terms of the progress on client metrics across buckets? Because practically over the course of last 5 to 6 quarters, there has been a limited change there.

[Rohit Anand, executive]

Yes. So maybe I'll answer the second one first and Mohit...

[Mohit Joshi, executive]

Yes, I think if you look at the top client buckets, like we said, we've added [ $250 million ] clients over the past 1 year. So I would see that as a sign of progress. Look, clearly, I think when we said, this is a multiyear journey, right? These are large companies. Turning things around in terms of changing the revenue mix by vertical, by geography, by client type, it takes time. But I'm enthused by the fact that we are seeing growth and stabilization in our key accounts.

If you go back to the 8 quarters before that, right, the top client metrics has seen a significant deterioration. We have arrested that now and are seeing growth. But like any other compounding exercise, right, it will take time for it to show up in a meaningful way. But I'm very confident that we're in the right direction, and the early metrics are very promising.

[Atul Soneja, executive]

Atul here. If I might just answer your first part of the question with respect to the subcon, I think, as you would have noticed, our utilization has gone down in the current quarter. And this is obviously building up a pool of talent that is being trained to get deployed for the pipeline and the wins that we have had in the past as well. And in the near term, if we have to go about getting a few more subcons, we would potentially do that.

But directly, what you will see is in the long term, we will be between 8% to 10%. That is what we are guiding towards. So I think we'll continuously be in that band. But on a quarter-to-quarter basis, you might just see an increase or coming down. But year-on-year basis, you will see us following that pattern.

[Operator]

Our next question comes from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

First question, Mohit, you said F '26 likely to be better than F '25 and...

[Mohit Joshi, executive]

Gaurav, can you speak up, please? Your voice is a little feeble. Can you speak louder?

[Gaurav Rateria, analyst]

Can you hear me now?

[Mohit Joshi, executive]

Yes, it's a bit better.

[Gaurav Rateria, analyst]

My first question is on fiscal '26 commentary better than fiscal '25. Here, arithmetic shows that it requires you to grow revenue sequentially over the next 3 quarters. So do you expect this to happen from 2Q onwards based on the conversion of the deals?

[Mohit Joshi, executive]

Yes. Yes, we do. We do expect that we will be able to deliver that based on revenue accretion from deals won previously, showing up from Q2 onwards.

[Gaurav Rateria, analyst]

Got it. And any key verticals that drive the growth or leads the growth?

[Mohit Joshi, executive]

Well, look, in this volatility, it's hard to say. Obviously, telco is our single biggest industry vertical for us, and that did show a negative trajectory through the year. Now that we have started off the year on a positive trajectory, I'm very hopeful that it will contribute to the growth. Our Comviva business facility has been doing really well and has been a growth contributor to us.

Beyond that, we have stated our long-term ambitions for growing our financial services business. Manufacturing, that is difficult, to be candid. We had shown our ambition to grow our financial services business, and I remain optimistic about the long-term outlook there.

Retail has been a business where, especially in the Americas, our team has done a wonderful job in client wins and client conversions. One of those deals with a U.S. fashion apparel manufacturer, I pointed out in my sort of opening comments as well. So we feel quite positive about that. So I would say that certainly from my perspective, I'd be watching BFSI, retail and telco very carefully.

[Gaurav Rateria, analyst]

That's very helpful. Second question. On generative AI, have you seen any specific new use cases, which you could say that would be a net new spend for industry and for Tech Mahindra? And are these use cases leading to increase in the size of contracts? Any evidence of that would be helpful.

[Mohit Joshi, executive]

Yes. So from a -- I'll give you one example. From a telco perspective, we see autonomous networks and network optimization and AI within the network as a very powerful spend area.

As you know, for one of our European clients, we have committed to getting them to L5 level from a [ TM4M ] certification perspective. And that would mean a significant reduction in contact center, volume would be a significant reduction in IT and overall network expense. So that is a very powerful telco-specific use case that we have seen.

From a Comviva perspective, we have been using AI to help sort of reduce churn and increase ARPU again from a telco customer perspective. But there's no reason why the use case cannot be used for retail also.

So these are two relatively new use cases that I can think of. Besides that, you have the traditional use cases from a developer productivity perspective, from a contract management perspective, from a contact center perspective. We will continue to focus on that.

I feel that our new set of offerings, which are an agentic AI platform that we should hopefully announce soon enough with 200-plus agents already developed, that will provide a very useful platform for our Fortune 500 customers. We really think about agentic AI in terms of a set of cartridges, right? So the horizontal cartridges for F&A, for HR, for contact center. And then there'll be the vertical-specific cartridges, which are maybe insurance focused, telco focused, right?

So I think that combination of agents being available to clients to use for multiple use cases will be a great sort of profitable tool for them and a powerful revenue generator for us.

[Gaurav Rateria, analyst]

Got it. Last bookkeeping question for Rohit. What's the number of freshers that we onboarded in 1Q? And what's the likely target for fiscal '26?

[Rohit Anand, executive]

Yes. Gaurav, I think it's 250. It's marginal, given the demand scenario that we saw. And as you know, we'd hired close to 6,000 last year, right, so we're working through the learning development platform absorption of that pool, right, within the ecosystem. So that's the focus right now. As we continue to drive more visibility and progress through the macro to the year, we'll drive that action more.

And I think also there's a little bit of new -- and we'll update that in our AI session, as Mohit mentioned, there's a new dynamics around how do we look at our employee base collectively from an AI perspective as well, which is an advantage for us, given the experience profile we have. So we're evaluating that in mix of AI. But generally, we will hire more as we progress towards the year.

[Operator]

Our next question comes from the line of Ashwin Mehta from AMBIT Capital Private Limited.

[Ashwin Mehta, analyst]

So Mohit, you earlier mentioned that your average experience is almost double of your peer group. So from a pyramiding perspective, when do we start to see the movements because even from your annual report,perspective, your less than 30-year age bracket has gone down in terms of proportions. So one question is when do we start to see that? And secondly, how growth dependent that is in terms of both layering of experience and secondly, the fresher induction?

[Mohit Joshi, executive]

Yes. So look, I think, as you know, the pyramid, we feel is a great source of strength for us, especially in this current environment, where clients are looking for experience profiles. And this specifically has to do with AI because if you're looking at complex AI use cases, if you're looking at the applicability of AI to client landscapes, it requires a deeper understanding than maybe sort of a fresher workforce, right? So we do feel it is an asset for us.

Obviously, we have to reshape the pyramid over a period of time, which is why we hired 6,000-plus fresh graduates last year. I'm hopeful that when the industry comes back to some semblance of normal growth, that absorption capability will be significantly increased.

But candidly, the dramatic reshaping of the pyramid is not an FY '27 exercise. That will probably be a longer-term exercise in really reshaping the pyramid. And I don't think we will ever get to where our peers are in terms of the pyramid, but I feel a halfway house between where we are now and where they are. It could be something for us to push for over the next couple of years.

[Ashwin Mehta, analyst]

Okay. That's fair enough, Mohit. And just one question in terms of receivables bump-up this quarter. What was the driver of that? And is it a single segment driven? Or this is much more broad-based?

[Rohit Anand, executive]

No. It's a couple of regions that we had timing delays, which you already got through in July. So I would say it will get better as we move forward. And some of it is seasonality in 1Q. Typically, every year, if you see, has a 4Q versus 1Q increase. Some of it is that, and some most timing, which we have recovered. So I think it will get averaged out as we move towards Q2 from a Q1 perspective.

[Operator]

Thank you. Ladies and gentlemen, we'll take that as a last question for today. I now hand the conference over to the management for closing comments.

[Mohit Joshi, executive]

Well, thank you all. Thank you all for participating in our quarterly conference call. Again, like I said, we are pleased with the progress that we have made so far in our transformation journey. And I do believe that our numbers show a steadily strengthening performance and a really capable team. We look forward to reporting further on our progress in the quarters to come. Thank you.

[Operator]

Thank you. On behalf of Tech Mahindra Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.