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Good quarter with consistent execution

* 2QFY26 earnings were generally better than expected.

* Trimming our margin estimates to account for commentary & uncertainty.

* Remains our top pick but with a lower TP of Rs1,658 vs. Rs1,908 earlier.

2QFY26 results summary

Tech Mahindra or TechM’s 2QFY26 constant currency (CC) revenue increase (0.9% qoq) was in line with our estimate, while the EBIT margin was above. New order intake at US$816m was encouraging and drove TTM yoy growth to 57% vs. 43.8% as of 1QFY26. Key takeaways from the earnings commentary include 1) the restructuring exercise (of the past few quarters) could start yielding results, 2) stability/improvement across portfolio verticals while there is stress in the commercial automotive segment, 3) temporary growth challenges in Europe, 4) partnering, as a part of IndiaAI mission, to develop indigenous sovereign large language model (LLM) with 1tr parameters, and 5) the current macroeconomic uncertainty could temper FY27F growth expectations (for industry and TechM; consistent with the underlying thesis: report link) vs. at the start of restructuring exercise). Consequently, we trim estimates, which, in turn, drives our target price lower

Deal-win momentum continues

The net-new deal-win (at US$816m; up 0.9%/35.3% qoq/yoy) momentum continues across verticals such as communications, manufacturing, banking financial services insurance (BFSI), retail, transport and logistics, driving TTM wins up 57% yoy to US$3,168. Management commentary suggests that although the aspiration to reach US$1bn quarterly bookings continues, and, in turn, could improve revenue growth trajectory & visibility, the mix of booking (discretionary/legacy mix) is critical too & that the US$800m range may be good enough to sustain the current growth momentum, if discretionary mix increases.

Improving margin execution

The EBIT margin at 12.1% (sequentially up 108bp qoq & 252bp yoy) beat our estimate by 49bp driven by an improvement in fixed-price project productivity, volume growth, SG&A optimization and INR depreciation. Commentary suggests the company is on track to achieve its stated FY27F EBIT margin target driven by operating leverage, focus on profitable growth (governance on contractual review), and project Fortius-led disciplined execution (offshoring, integration of portfolio companies).

Maintain ADD rating but with a lower target price of Rs1,658

We introduce FY28F and now expect 3.2% US$ revenue CAGR & ~18% PAT (Rs.) CAGR over FY25-28F. We shift our valuation to P/E (vs. PE/G) and value TechM at 21x FY28F EPS to arrive at lower target price of Rs1,658 (Rs1,908 earlier). Improved execution visibility, restructuring-led earnings growth, cash conversion, and improved capital allocation support our thesis. Downside risk: Weak revenue/EBIT margin execution led by customer and/or senior leadership attrition. Financial Summary Mar-24A M

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