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Strong deal momentum

Tech Mahindra (TECHM IN) Q3 revenue and margin performances were better than our estimates. TECHM is seeing revival in its communications segment on the back of recovery of spending by its top accounts in the US as well as on a mega deal win of USD 500mn from an EU telco this quarter. The company says this further strengthens its position in this vertical. The BFSI vertical witnessed seasonal furlough, but it is likely to see recovery in the next quarter. Margin continues to see further improvement on account of higher mix of fixed price projects as well as pyramid optimization. Orderbook for the quarter sees a sharp jump, due to mega deal; however, it continues to see an upward trajectory in the past few quarters. We retain Accumulate and raise our TP to INR 1,840 based on 22x FY27E earnings

Growth driven by the EU and communications segment: Revenue grew 1.7% QoQ in CC terms. Growth in USD was 1.5% QoQ. Performance in INR terms was better at 2.8% QoQ, due to crosscurrency tailwinds. In Q3, the Americas reported revenue growth of 3.1% QoQ, with the EU up 2.2% QoQ, while the RoW market declined 2.3% QoQ. Vertical-wise, the communications vertical saw an uptick, with revenue growth of 2.8% QoQ. Retail grew 4% QoQ, followed by the healthcare and technology verticals, up 3% QoQ while revenue from BFSI contracted 6.2% QoQ in Q3. New deal total contract value (TCV) came in at USD 1,096mn, up 34% QoQ and 47% YoY, the highest since Q3FY20. Last Twelve Months (LTM) attrition was down 50bp QoQ to 12.3%. Headcount decreased by ~3K QoQ based on a higher share of fixed price contracts.

Margin expansion led by Project Fortius: EBIT margin expanded ~100bp in Q3 to 13.1%, largely by fixed?price productivity, volume growth, and operational improvement from Project Fortius, including better utilization, disciplined pricing, and improved revenue mix. TECHM remains on track to achieve a 15% EBIT margin by FY27, underpinned by its pricing discipline and a continued focus on avoiding margin-dilutive large contracts.

Retain Accumulate with a higher TP of INR 1,840: The company’s communications vertical, which formed >40% of its revenue mix for the past 2-3 years ago, witnessed continued softness, due to dried-up spending from its top clients in the US as well as no major progress in the EU market. The decline is likely to be arrested, due to recovery in US telecom clients as well as mega deal win in the EU market. BFSI growth is likely to see acceleration on account of new logo wins. The company also saw growth in USD 20mn+ clients, which are growing faster than the company’s average and are more profitable, helping it to improve profitability. TECHM retains FY27 EBIT margin guidance of 15%. We factor in numbers from the mega deal into our estimates as well the recovery in the communications vertical, resulting ~5-10% increase in revenue estimates and 7-8% in earnings during FY27-28. The stock has run-up 20% in the past two months vs the index up ~8%; TECHM currently trades at 29x FY26E P/E and 20x FY27E P/E. We increase our TP to INR 1,840 from INR 1,640 based on 22x (from 21x) FY27E EPS based on the improving outlook of its largest vertical as well as strong earnings. We retain Accumulate

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