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Healthy operating performance; margin improvement on track

Tech Mahindra reported broadly inline performance for the quarter. It reported revenue of Rs 133.1bn( up 2.4% QoQ in INR terms, up 1.9% QoQ in USD terms). The sequential growth was led by Communication( up 2.7% QoQ), Hitech and Media( up 5.7% QoQ), Retail and Transportation( up 5.6% QoQ); While, Manufacturing( down 4.0% QoQ) and Healthcare (down 1.8% QoQ) had weak performance. In terms of geographical breakup, Americas declined by 0.7% QoQ, Europe increased by 4.6% QoQ and RoW increased by 5.0% QoQ. The cc growth was 0.7% QoQ in cc terms. EBIT margin improved by 114 bps QoQ to 9.6%, led by positive operating leverage. Reported deal TCV of $603mn vs $534 mn in Q1FY25. Total headcount grew by 6,653( ~4.5% QoQ) employees to 154,273 employees. Attrition increased by 1pp QoQ to 11%. Offshore effort mix grew 90 bps QoQ to 76.3%. No of Active clients increased by 13 QoQ to 1,178 clients. Declared interim dividend of Rs 15/ share. The near term business environment remains similar to Q1FY25 with muted discretionary tech spending by clients. However, there is some uptick in the business outlook for the BFSI segment. It remains focused on increasing its win rates for large deals even as the near term focus is on margin improvement. We expect Revenue/EBITDA/PAT to grow at 9.1%/36.1%/53.2% over FY24-FY27E. We have revised our FY25E/FY26E/FY27E EPS by +0.2%/+0.4%/NA. We roll over to Sep’26E for valuation and maintain ADD Rating with revised target price of Rs 1,803 (vs Rs 1,629 earlier) at PE multiple of 22x(unchanged) on Sep’26E EPS.

Revenue growth was slightly above estimates

Revenue grew by 2.4% QoQ in INR terms, up 1.9% QoQ in USD terms. The sequential growth was led by Communication( up 2.7% QoQ), Hitech and Media( up 5.7% QoQ), Retail and Transportation( up 5.6% QoQ); While , Manufacturing( down 4.0% QoQ) and Healthcare (down 1.8% QoQ) had weak performance. It aims to drive revenue growth through front end integration of portfolio companies and developing account centric strategies for top accounts. We expect revenue growth to recover going ahead led by growing traction in Generative AI solutions. The focus going ahead would be on organic business growth. Also, the ongoing effort towards rebalancing of portfolio to get it more diversified would continue going ahead.

EBIT margin improved sequentially

EBIT margin improved by 114 bps QoQ to 9.6%, led by positive operating leverage. It continues to work on multiple margin levers that include improvement in employee pyramid, higher utilization, lower subcontracting cost to drive margin. It aims to save around ~$250mn annually through its cost optimization efforts. We expect EBIT margin to improve gradually to around 14.5%-15.0% by FY27E.

Maintain ADD Rating on the stock

The near term demand environment remains challenging with pressure on discretionary spending by clients. We expect gradual recovery going ahead led by ramping of recently signed deals. The management focus on driving operating margin is on right track. We expect Revenue/EBITDA/PAT to grow at 9.1%/36.1%/53.2% over FY24-FY27E. We have revised our FY25E/FY26E/FY27E EPS by +0.2%/+0.4%/NA. We roll over to Sep’26E for valuation and maintain ADD Rating with revised target price of Rs 1,803 (vs Rs 1,629 earlier) at PE multiple of 22x on Sep’26E EPS.

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