Tariff anxiety vanished Q2 onwards.

Unlike most of our services peers, we are also participating in the AI LLM layer. So, when you take a panoramic view of our portfolio and assess how AI may augment/ impact different service lines, how do you characterize the delta due to AI at the overall company level, deflationary, expansionary, or initially deflationary and then expansionary?

Yes, so I feel that in the long run, my view, and thankfully, this is a view that has become more common over the past couple of months, is that while there is productivity expectation from customers, I think customers' expectations are becoming more realistic over time. When this AI journey first started out, you would have thought that by now, 100% of the code would have written itself. I think customers' expectations about productivity are now higher than they were with, let's say, pure automation and pure simplification. But it is in the same sort of ballpark. Nobody's expecting, and if people are giving it, I know how they're giving it, 80% productivity over the next five years. I feel that those expectations have been set back to a more realistic level. I feel there is the understanding that to really get the benefit of AI, you need to be able to simplify, to modernize, to build a common and consistent data stack, which would again be a tailwind for the industry. At this point of time, I just want to make a mention of our Tech M Orion platform. We have grown our agent base now to 300-plus agents, and these are now able to solve not just simpler problems, but actually fairly complex IT problems and also complex business problems like KYC. I think the final piece that we will be unveiling hopefully soon is a new commercial model, which is a new commercial model of how AI plus services will be delivered to our clients.

A few questions on margins for you. Firstly, the gross margin improved by around 40-50 basis points sequentially, which would be almost entirely currency-led, would you just help us reconcile that in terms of percentage?

Not really, Surendra, because the currency benefit happens at a G&A level also, right? The INR costs get converted at a lower rate, right, to USD. That benefit is split. So, it's not really truly FX-driven. There are improvements happened also on operating efficiency as we looked at various aspects as well. And when you look at Project Fortius overall, right, our actions are driven across the board, not just on the gross margins, but also on the G&A, SG&A level, on various areas that we have been deployed. For example, portfolio companies, we said that's a big focus for us to rationalize economies of scale when we put them together, right, from an integration perspective. That predominantly flows through at a G&A line item, but some impact also happens as a gross margin. So, impacts like those are split across the line-item level. So, you are going to look at collectively and FX and G&A split equally between both.

If I look at the last two quarters, your gross margins have remained constant while the entire margin improvement is driven by SG&A, which is down 150 basis points of the percentage of revenue. And this is the lowest level since you guys took over. So, firstly, SG&A, should we expect more reductions going forward? Like what will drive the margins from here?

So, margins will be driven by both. But I think the improvement from a weightage standpoint, you will see more coming through in the gross margin versus the SG&A as you look at the next six quarter journey. And contribution from SG&A would be range bound, right? We still have a lot of integration still to go on portfolio companies that are still to integrate with us. So, those efforts will continue. There are other specific initiatives going on, on areas which are in the G&A line item on productivity and efficiency standpoint. But predominantly, if you look at the benefit, I mentioned that also in our discussions earlier in our meetings and earnings calls that a big part of our margin driver from a gross margin standpoint continues to be the improvement on the fixed price projects. I think that's 55% to 60% of our portfolio. And we continue to drive productivity actions there. And that's what's going to contribute as we move forward in terms of contribution from here to the 15% target.

We are in the midpoint of our strategy plan. And if we look at where we are today in the context of just the client 6 to 10 and 10 to 20, that seems to have been a meaningful advent for us at the moment. Just want your thoughts on what are the pain points in the portfolio that sort of hurting growth and what needs to change. And apart from that, I think even this time from a communications perspective, when we had assumed stability, it's been a little softer. And you also mentioned some vendor consolidation deals in Europe which could sort of aid growth. Any update there? And finally, on manufacturing, the growth there was a surprise. So, how do you see things sort of evolving there as well? And finally, from a margin perspective, considering we are at the midpoint of the journey, do you think it gets harder from here in terms of incremental expansion or there are things that are already laid out, and it should go as per plan?

So, first of all, I think if I zoom out a little bit and you look at the clients where we have over $20 million of revenue, because at the end of the day, these are the clients that give us the vast majority of our revenue. This is where the focus has been. And within these clients, we have been able to show a steadily improving trajectory of growth, which is very different from the growth we had earlier. If you go back just a couple of years, you will see a lot of our growth was coming from sub $20 million clients. So, I feel that the focus is yielding efforts. Obviously, within any sort of client bucket, you may have one client where sort of spend just goes dramatically off a cliff or a major project comes to an end in a particular quarter. And so that has an impact. But I don't feel that any client relationships are unhealthy or damaged in that sense or there is anything structurally wrong. Last quarter, for instance, you will remember, we had mentioned that a semiconductor client of ours, pretty obvious, was scaling down its operations in a very significant way. It was a very big client of ours and so we had a massive ramp down of our teams. In terms of your question on communications, yes, the overall communications portfolio is down this quarter. But again, if I break that up into the various regions, I think we have done well from an Asia-Pacific and India-Middle East and Africa perspective. Our U.S. business also has done well, which includes our largest customer. Our U.S. business has grown. In Europe, we had a challenge where, again, I don't want to talk about any client-specific issues, but Europe, the problem was localized within Europe. And again, I do feel it's a temporary piece. I expect to get back to stability and growth in the overall comms portfolio in the second half of the year, obviously accounting for things like furloughs within Q3. As far as the manufacturing business is concerned, as we mentioned, our aerospace business has done very well, driven by a couple of significant client acquisitions over the past one year. So, that has been a big growth driver for us. Our auto business, like we said, we are seeing some stabilization in the passenger segment but see some concerns from a commercial vehicle segment. And we also saw some strength in Pininfarina in the quarter. Clearly, it always gets harder the closer you get to your targets, but it is something that, as you mentioned, we had a comprehensive plan when we started.

I think one you missed is on the vendor consolidation opportunities in Europe for cost, which you had mentioned last quarter?

Yes. So, vendor consolidation opportunities, I think it is going well. Some initiatives are coming closer to our decision, and we are watching this carefully. As you can imagine, some decisions have been deferred by little while and some are sort of mid-process. But hopefully, over the next couple of quarters, we should come back to the portal net. We continue to be very confident about our deep telecom strengths and as you know, we have been buttressing those strengths, specifically in Europe, with the addition of Amol Phadke, most recently, who was the CTO for Telenor. So, we continue to be working on that. I think we have an exceptionally strong team in the region. And hopefully, we should have more to report in the coming quarters.

At the midpoint of your 3-year transformation effort, I wanted to see if you can just comment on how you feel about your execution and progress, not just on the outcome metrics and the results that we can see externally, but also if you could share your perspective on how you are progressing on your input metrics and some of the foundational capabilities that you have been investing in over the last year and a half.

Thank you, Rod. Look, I think it is a good question because we often go back and reflect on the fundamentals of the FY '27 transformation. And when we laid out the vision for FY '27, we had a plan for revenue, a plan for margins, and a plan for the organization. And if you think about it, the plan for revenue was really about focus. It was really about focusing on our top segments, our top service lines, our top clients, and focusing on, for instance, must-have acquisitions within the clients that met our qualification criteria. So, if I look at it from a focus perspective, we have managed to, I believe, strengthen and increase our dominance within Telco and manufacturing and make good strides as are reflected in the results this quarter of the progress that we made in healthcare and retail and financial services. The new client acquisition that we have had also, the 50-plus clients that we have added, over 16-17 of them have scaled up to over a million dollars in revenues. So, I feel that the focus from a client perspective and from a vertical perspective is working well. From a service line perspective, we have identified service lines like Data and AI, like Cloud, like Engineering that we wanted to focus on, and I believe that these service lines are seeing above-average growth. The margin or the productivity part of our plan was really about operational rigor. I believe the operational rigor has done wonders for us. But today, the most important part of the plan was the third, which is building the organization for the future. And building the organization for the future is actually where I am proudest of the achievements that we have delivered as a team. For one, I believe we have built an exceptional leadership talent bench. So, across the 3 areas of focus for us, across 3 areas of transformation for us, the focus, the operational rigor, and building the organization for the future. All 3 parts, I believe, are moving well and we will, it is like any wheel, right, hopefully, it will start to spin faster and faster in the next 6 quarters of our transformation journey.

Just real quick. Is your view the same on acquisition interest and capital allocation overall?

Yes, so look, I think we are committed to our capital allocation policy over the next 6 quarters. We have started to think about and discuss with our Board on what shape a programmatic M&A may take in the future and how we look at identifying service lines, regions, and verticals, where we have an interest in sort of tuck-in acquisitions or transformation acquisitions. But again, nothing will change for the next 6 quarters where any acquisitions will be tuck-in only. And as we start to be more ambitious and aggressive in this regard, we will always keep in mind that we need to ensure sort of both growth and profitability for TechM. So, you will not see any 180-degree shift in this regard any time soon.

Mohit, just reply to the first question. Correct me if I am wrong in understanding. You are saying even in FY '27, the industry growth rate cannot bounce back and in that scenario, are we changing our goalpost where we also may not be able to outgrow which was our earlier target versus industry growth rate?

Sorry, I either must have misspoken, or I must have misunderstood because I got another message on the same question as well. We are not saying that at all. All we are saying is compared to where we were when we started the journey, right, when we started the journey in April'24, at that time, the growth expectation for the 3-year period was very different from where we find ourselves today. So, to be clear, we fully expect FY '27 for the industry and for Tech Mahindra to be better than FY '26. But if at the start of our transformation journey, we were expecting sort of maybe not exactly COVID, but a return to standard industry growth rates, we expect slightly more muted growth now because look, we are just 6 months away from the start of FY '27, but we are not expecting next year to be the same as this year. We are expecting higher growth for the industry and for ourselves next year.

And in that journey, do you believe the current new business TCV which is improving Q-on-Q, but hovering around closure to $750-$850 million needs to substantially pick up or you believe this is enough for us to achieve the goalpost?

So, ideally, I think Rohit had shared this calculation in one of the previous calls. Ideally, we want to get closer to the billion-dollar mark and I believe that we are slowly and steadily getting there, right? Look, when we started our journey, we were at the 400 million mark. I think we have now delivered 800 plus for 3 quarters running and we do see a very rich pipeline which we will hopefully convert and get closer to that number in the coming quarters. But again, I just want to stress that our large deals that we report are only net new revenue and go through a very rigorous process of both internal and external reviews. And so we feel it should give you sort of confidence and transparency on how much of that will go into future growth.

We made very good progress on our margin journey. Just wanted to understand over the next 6 quarters, how should we be thinking about the interplay between our gross margin improvement and some of the SG&A efficiencies, given that we did see some progress with regards to our onsite offshore mix change, we have seen progress on subcontracting happen over the course of recent quarters, as well as some focus around the fixed rate engagements. Would be great to get your thoughts on that?

Yes, sure. So, I think, as I mentioned earlier also, I think SG&A will continue to drive actions, whereas the percentage of contribution of the impact will be relatively lower. You will definitely see a leverage impact as revenue goes up next year. As a percentage, we will see the benefit because we will not add in the same proportion as we move forward. We will continue to optimize it. That should give a leverage. From a gross margin perspective, you will see the majority of the productivity come there because when you think about the big actions we have articulated in the past, we said our T&M portfolio is quite aligned with market-leading returns. We have some marginal opportunities, which we will keep on going after. But from a contribution perspective, what will contribute is the productivity in the fixed price program. So, that will be the major contributor, along with the value that we want to derive from the portfolio companies. So, today, when we started the journey, we said we will start integrating them. We started the integration both on the back end as well as middle and the front-end office. From the middle office and delivery, everything got aligned to Atul's organization. And as we move in that mid-path of the journey, now we are starting to realize value, and that will flow through also in the gross margin. So, you will see portfolio company contributions, you will see fixed price productivity that will be a majority of that, and that should flow into gross margin while you see some leverage flow through in the SG&A side.

And the last question was in sales and support headcount. This number has been coming off through several quarters now. Any sense on how should we be thinking about this? Is there more optimization around as we consolidate some of our support functions?

Yes. If you think about it, portfolio integration is obviously a big part of it. As we take over the back-end operations, centralize the shared services, we have done that across functions. We are working with Biren's team in the BPS org to consolidate that for us and use the right Agentic platforms to automate the way we run the back-end operations. So, that is obviously yielding to, as we integrate, yielding to a benefit around the reduction in cost and productivity. And we are able to redeploy where we are applicable people on the billable road. So, I think that is what we are trying to drive, and that process will continue as we move forward.

And one last clarification question. During the last quarterly call, you had mentioned that some of the deal wins that you have seen should support pick-up in growth momentum in a steadier manner through second half. Does that outlook still hold true?

Yes, very much so. We are expecting that the second half of the year will reflect the improved performance, based on our strategic actions that we have taken in the first 6 quarters of the year. Obviously, you have to overlay the seasonality on that, and you have to overlay what happens in the broader economic context. But on the whole, I think we are optimistic that the second half of the year will be better than the first half, which is also good.