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In-line performance; delivery execution off to a steady start

Tech Mahindra (TechM) reported a broadly in-line operating performance. Revenue inched up 0.7% QoQ to US$1.56bn, largely meeting our estimates. Growth was fairly broad-based, with 5 of the 7 verticals seeing QoQ growth (decline in Communications due to Comviva seasonality). EBITM of 8.5% was also in line with our estimate, with headwinds from Comviva seasonality and higher visa costs offset by benefits accrued from Project Fortius. The management highlighted that its ‘speed at scale’ strategy is being well received by clients, and reiterated that FY25 should be better than FY24. The demand environment has remained fairly similar to last quarter’s, albeit seeing some improvement versus previous year. With the company’s delivery execution to achieve its ‘Vision 2027’ strategy off to a solid start, we hike up our target multiple to 22x (from 19x). We tweak FY25-27E EPS by -2% to +2%, factoring in the Q1 performance and higher ETR assumptions. We maintain ADD and raise our TP to Rs1,650/sh (from Rs1,425 earlier) at 22x Jun-26E EPS.

Results Summary

Revenue grew 0.7% QoQ (0.7% in CC) to US$1.56bn, broadly in line with our estimates. Revenue for IT Services and BPS verticals grew 0.6% and 1.3% QoQ on like-to-like basis. Five of the 7 verticals saw sequential growth, with Manufacturing (2.4% QoQ), Hi-Tech and Media (0.5%), BFSI (0.7%), Retail, Transportation and Logistics (5.2%), and Healthcare and Lifesciences (7.9%) seeing growth. Communications and Others declined 1.9% and 5.2% QoQ, respectively. Among geographies, Americas grew 3.9% QoQ, while Europe and ROW declined 2.6% and 2.7%, respectively. Adj. EBITM expanded by 110bps to 8.5%, broadly in line with our estimate of 8.3%. Net new deal wins remained steady at US$534mn. Total headcount grew 1.5% QoQ/-0.5% YoY to 147,620, with the inclusion of ~2,100 interns among BPO professionals resulting in QoQ growth. Attrition was stable at 10.1% (vs 10% in Q4FY24). What we liked: Steady operating performance and deal intake. What we did not like: Weak cash conversion (~64% OCF/ EBITDA).

Earnings Call KTAs

i) Performance was led by broad-based growth across verticals except Communications, which remains subdued. The management indicated that Comviva seasonality impacted revenue and margin by 50bps. TechM continues to focus on execution and is on track to achieve its stated goals for FY27. ii) BFSI demand trend has been stable, with improvement in US spending across asset and wealth management, cards, and payments, while investment banking and lending remain soft. The management sees new opportunities in existing accounts and addition of new logos; however, it expects some volatility in performance in the near term, considering the smaller footprint. iii) Telecom continues to face challenges, but the decline has reduced to a single digit and the company expects YoY improvement in coming quarters. iv) The management believes levers are in place for margin improvement, with building the employee pyramid as the major driver over the medium term. It added ~1,000 freshers in Q1. Project Fortius aids ~120bps margin improvement during the quarter. v) The management has no plans of wage hikes in FY25 for now, and will re-evaluate this stance in H2. vi) TechM launched TECHM Verify during the quarter, focusing on the validation and assurance framework for AI systems, thus addressing the missing link in wide-scale AI adoption. vii) The management shared that over 25,000 associates have been trained with AI skills and the company now offers over 100 AI-based solutions. viii) The management indicated that contact-center dependency is <5% of revenue at the company level.

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