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Tech Mahindra Ltd. reported Q2FY25 revenues at $1,589mn, growth of 0.7% QoQ and 1.2% YoY in cc terms. In USD terms, revenue was up 1.9% QoQ and 2.2% YoY. In INR terms, revenue stood at INR133bn, up 2.4% QoQ and 3.5% YoY. Growth was broad based across verticals except for Communications industry, where there is weakness. PAT for the quarter came strong at INR12,501mn (+153.1% YoY) driven by high other income (one-off). EPS for the quarter stood at INR14.1. The reported net new deals stood at $603mn for the quarter.

*  Progress around Phase-I of strategy: Despite the overall softness in the IT services industry, the company remains committed to advancing its strategic improvement initiatives, focusing on strengthening client relationships and expanding its partner ecosystem. The Communications vertical experienced a 1.7% YoY decline as key telecom clients prioritize cost savings, resulting in constrained budgets for discretionary projects. Similarly, the Manufacturing vertical saw modest growth of 0.6% YoY, reflecting a conservative outlook on discretionary spending and softness in auto segment. In contrast, the BFSI vertical reported a robust 4.5% YoY growth, driven by strong partnerships and the acquisition of new clients, while the company is optimizing its capabilities to support long-term growth in areas like insurance, asset management, and payments. Other verticals also demonstrated positive momentum, with Technology, Media and Entertainment growing by 2.4% YoY, Healthcare and Lifesciences by 4.5% YoY and Retail by 4.7% YoY, showcasing the company's adaptability and positioning for future success.

*  Priority segments: The company has identified key areas for above-normal investments aimed at achieving its FY27 targets and will provide annual progress updates on these initiatives. Efforts are being made to enhance capabilities in focused service lines by broadening leadership and investing in technical specializations. The company is also strengthening its fresh graduate hiring program to foster the right mindset and future skills. By prioritizing AI-first and cloud-first skill sets, a Next-Gen skill framework has been established for IT associates, promoting career mobility within the workforce. Additionally, the company is committed to creating and sustaining an outcome-driven learning organization while cultivating a high-performance culture grounded in the principles of simplification, clarification, innovation, and performance orientation.

*  EBIT Margins to expand: Operating (EBIT) margins for Q2FY25 rose to 9.6%, up 113bps QoQ due to cost saving efforts under project Fortius, continued focus on operational efficiencies and forex movement. The company has initiated targeted programs aimed at enhancing the efficiency of its operations, including pyramid optimization, utilization improvement, sub-contracting expenses reduction and value-based pricing.

Valuation: The H2, based on the foundational inputs provided regarding margins, there is a strong confidence in maintaining the positive trajectory established in the H1. The company is on a path to sustainable long-term transformation, bolstered by the intrinsic strengths of Tech Mahindra. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 8.1%/32.6%/37.2% respectively over FY24-FY27E. We upgrade our rating to BUY to arrive at a target price of INR1,834 implying a P/E of 28.5x on Sep-FY27E EPS of INR64

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