It is three years since Tech Mahindra finalized its merger with Satyam, a challenging journey of 18 months, to diversify its client base from BT (29% of revenues in Q3 FY 2013), the telecom services overall and from Europe (its then largest vertical by far, representing 46% of revenues). At the Tech Mahindra indicated several ambitious targets for CY 2015:

• Reaching $5bn in annual revenues by Q4 CY 2015 (up from $2.7bn in pro-forma revenues) from a combination of inorganic and organic growth
• An EBITDA margin in the 17% to 18% range
• Focusing its portfolio around NMACS (network, mobile, analytics, cloud computing and security)
• Further verticalization, focusing on telecoms, financial services, and manufacturing, technology & media, also healthcare, retail and energy.

So how has Tech Mahindra fared against these objectives?

Financial performance has been healthy but mixed, on a par with Infosys and Wipro:

• Organic revenue growth has been fluctuating in the past three quarters in the 5% to 10% range. The company is now on a run-rate of $4bn in revenues, having reach $1bn in quarterly revenue for the first time in the September quarter (Q2 FY16)
• EBITDA margin is within its 17% to 18% target range, but is fluctuating significantly from quarter to quarter, being impacted by acquisitions (LCC, whose operating margin was 8%) but benefiting from improving utilization and lowering SG&A costs.

In the development in its strategic verticals outside of telecoms, Tech Mahindra has yet to reap the full benefits of its Satyam acquisition. The telecoms sector still dominates, at 53% of total revenues. The company has made several investments:

• In manufacturing, merging its product engineering capabilities in 2013 to simplify its structure and focus its effort around IoT. It also acquired the legendary car design services firm Pininfarina. Did it overpay - an enterprise value of €92m, for a company with 2014 revenue of ~€87m and which has been loss making nine times in ten years? Also, Pininfarina positions Tech Mahindra in the car design industry, a very different activity from product engineering services
• In BFSI, acquiring SOFGEN, a Swiss headquartered specialist in Temenos and Avaloq software, $45m revenue. In spite of this, Tech Mahindra remains sub-scale in BFSI with ~$350m in revenues, and needs to invest further on specific segments.

Generally, Tech Mahindra is still not well known outside the telecoms sector where it is still positioning primarily on being a lower cost offshore provider. It is not helped by its low investment in sales and marketing.

Somewhat ironically, in spite of the lack of spending of telecom service providers both in Europe (poor macro conditions and price war intensity) and North America (M&As slowing down major contract decisions), Tech Mahindra has continued to perform well in the telecoms sector, achieving local currency y/y growth of 15% to 20% in recent quarters, thanks to several big contracts in Benelux (Base and KPN) and the U.S. Also it has redeployed personnel to newer offerings: network services overall and network virtualization. With its LCC acquisition it is developing in network engineering to benefit from investments in 4G and soon 5G network deployments.  The integration process is still taking place with Tech Mahindra repositioning the firm from activities such as civil works. The short term prospects in telecom, however, are not as good: the company is currently seeing a deceleration in telecoms revenue growth, with M&A activity delaying contract decision.

So - by Indian standards - TechMahindra's transformation remains a work-in-progress. There are some positive pointers for the future:

• Tech Mahindra has still around ~$350m in net cash and can fund its own transformation and growth acceleration. One strength, that might be overlooked, is that company has a stable shareholder, being 37%-owned by Mahindra & Mahindra, and can invest in its transformation for the long-term, rather than be overly concerned by quarterly fluctuations.
• Also the company seems to have accelerated on its service portfolio, reaching ~$500m in “digital” revenues (although vendors’ explanations of what constitutes “digital-related” revenues are still very vague), representing about 13% of total revenues, broadly in line with what some other vendors are claiming.