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Operational efficiencies bode profitability

Tech Mahindra Ltd develops and markets computer software for telecommunications equipment manufacturers, telecom service providers, software vendors and systems integrators.

* In Q1FY25, Tech Mahindra reported a revenue decline of 1.2% YoY to Rs.13,006cr, owing to muted performance across certain segments.

* EBITDA reached Rs.1,565cr, up by 16.9% YoY, with margins improving by 180bps YoY to 12.0% due to reduced subcontracting costs and other expenses.

* The company expects improvements in telecom and manufacturing segments and stable demand in banking vertical. Strategic initiatives such as adding new clients, new deal wins, AI investments and costsaving programmes such as Project Fortius and Turbocharge, are expected to improve margins and performance. Therefore, we, upgrade our rating to BUY on the stock with a revised target price of Rs. 1,645 based on 25x FY25E adjusted earnings per share (EPS).

Topline growth held back by segments

In Q1FY25, the company's revenue stood at Rs. 13,006cr, showing a slight 1.2% YoY contraction. The communications segment, contributing 33.1% to total revenue, declined 9.9% YoY, partly due to lower Comviva revenue. In contrast, the manufacturing segment grew 6.4% YoY, and the healthcare and life sciences vertical expanded 6.1% YoY, driven by robust growth momentum. In addition, the retail, transport, and logistics segments increased 4.9% YoY. However, a decline was witnessed in high-tech and media segments (-3.5% YoY), banking, financial services, and insurance (BFSI) (-1.2% YoY), and other segments (-5.5% YoY).

PAT grew on cost-saving efforts and operational efficiency

The company reported a substantial 16.9% YoY increase in EBITDA, totalling Rs. 1,565cr, driven by margin expansion of 180bps YoY to reach 12.0%. This improvement was largely due to effective cost management, achieved through Project Fortius initiatives and operational efficiencies, resulting in reduced subcontracting costs and other expenses. As a result, the company’s reported profit after tax (PAT) grew by 22.9% YoY to Rs. 865cr, benefiting from lower interest expenses.

Key concall highlights

* The company's total contract value surged by 48.7% YoY to USD 534mn, showcasing a well-diversified portfolio spanning across all segments and strategic regions.

* The company’s workforce expanded by 2,165 employees in the quarter, reaching a total of 147,620. The attrition rate was 10% and utilisation rate reached 86%.

* The company has introduced TechM VerifAI, a comprehensive framework for validating and assuring the quality of AI systems. In addition, it has developed over 100 AI and Generative AI solutions, enabling more than 25,000 employees to engage in AI-driven pair programming.

Valuation

The company's earnings performance was satisfactory, and the margin recovery was an encouraging sign of progress. The telecom segment is also expected to improve. In addition, the BFSI segment is leveraging new opportunities within its existing client base, with demand anticipated to remain stable. The manufacturing segment is also poised for growth owing to investments in technology. The management is focused on key strategic areas, including scaling up large accounts, adding new clients, developing cutting-edge solutions, and winning substantial deals. Coupled with Project Fortius and Turbocharge initiatives, these efforts are expected to yield enhanced margins and improved performance. Therefore, we upgrade our rating to BUY on the stock with a revised target price of Rs. 1,645 based on 25x FY26E adjusted EPS.

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SEBI Registration Number: INH200000345