Buy Tech Mahindra Ltd for the Target Rs 1,750 by Motilal Oswal Financial Services Ltd
Takeaways from our meeting with the CFO FY27 strategic plan remains on track in its final year; new targets awaited
We met with Rohit Anand, CFO of Tech Mahindra (TECHM), and the leadership team.
Key points from our meeting:
1) Telco is turning around—two deals are ramping up on staggered timelines, which should help the vertical transition from a multi-year drag to a neutral-to-positive contributor
2) The vertical mix appears balanced, with healthy traction across European auto, manufacturing, HLS, and retail, while exposure to the most challenged pockets remains limited
3) AI adoption is real but still in its early stages; management is cautiously approaching frontier-model licenses and partnerships as model capabilities remain a moving target
4) The 15% margin target remains within reach, although the new labor code and wage actions could add pressure in near term. We reiterate BUY on TECHM with a TP of INR1,750 (implying a 24% upside), based on 20x FY28E EPS.
Telco: Two deals, staggered ramps, a more stable backdrop
* Telecom vertical is a positive; deal ramps are on track. The first major deal is expected to be fully ramped by July, while the second is slated to begin in July and ramp up by October-November, with the ramp-up phase continuing for 4–5 months.
*After years of structural drag, the vertical is moving from a multi-year headwind to a neutral-to-positive contributor. The broader telco market was characterized as stable rather than booming, and no longer in a structural decline, with ongoing consolidation and fresh deal activity in Europe.
* TechM’s US telecom accounts are also stable. The company’s telecom portfolio is more mature and diversified across IT, BPS, and network services and products, serving more than 100 operators globally. This reduces dependence on any single client or service line. We see telco shifting from a multi-year drag to a growth contributor this year.
Margins: 15% target intact, but labor code bites
* The 15% margin target remains within reach; however, management highlighted a few distinctions: The new labor code is a meaningful negative, with roughly USD10–12m impact on BPO (~1–1.2% margin hit for the business), alongside an additional 20–25bp pressure at the consolidated level. Further, salary increases are now materially more expensive (a 6–7% increment could effectively cost ~15% once the code applies).
* Management expects to decide on wage actions within a month, with juniorlevel adjustments likely to be the first step.
* While these factors could create near-term volatility, we continue to believe the 15% margin target remains achievable through operational improvements, utilization gains, and scale benefits from recent deal wins.
Valuation and view
* We estimate FY27 EBIT margins at 14.8%, translating into a 25% CAGR in INR PAT over FY26-28. We remain positive about TECHM’s restructuring under the new leadership, although the impact from these steps is likely to be visible gradually. Early signs of a turnaround in the communications vertical, supported by a large Europe deal, reinforce confidence in the medium-term growth outlook.
* We continue to like TECHM’s bottom-up turnaround story. We value TECHM at 20x FY28E EPS with a TP of INR1,750 (24% upside). We reiterate our BUY rating on the stock.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
