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Growth receives a step-up Further margin upside beyond 15% possible

* Tech Mahindra (TECHM) reported 2QFY27 revenue of USD1.7b, up 2.4% QoQ in CC, above our estimate of 1.7% CC growth. Retail/Communication/Technology rose 9.6%/6.0%/2.8% QoQ, Others/Manufacturing declined 15.0%/3.9% QoQ (in USD terms). EBIT margin expanded 40bp QoQ to 14.8%, above our estimates of 14.4%.

* Adj. PAT stood at INR16b (up 8.2% QoQ/32.8% YoY), below our estimate of INR17b. Net new deal TCV was USD1,023m, down 5.1% QoQ and up 25.4% YoY.

* In INR terms, revenue/EBIT/adj. PAT grew 16.6%/46.4%/30.6% YoY in 1HFY27. In 2HFY27, we expect revenue/EBIT/adj. PAT to grow by 11.7%/28.7%/44.7% YoY. We value TECHM at 20x FY28E EPS with a TP of INR1,950 (18% upside) and reiterate our BUY rating. TECHM remains our preferred pick among large-cap IT companies.

Our view: Growth momentum sustained; deal wins support visibility

* Revenue growth momentum is expected to sustain: YoY revenue growth has accelerated for the fifth consecutive quarter to 7.2% YoY CC in 2QFY27, placing TECHM ahead of large-cap IT service peers, and we believe it will remain the fastest growing player among the six large-caps in our coverage. We expect good revenue visibility, supported by the ramp-up of large deals, wallet share gains within existing accounts, and AI-led transformation demand. We build in 7.1% YoY CC growth for FY27.

* Margin expansion remains on track, with scope for further improvement: EBIT margin expanded 40bp QoQ to 14.8%, driven by volume growth and Project Fortius savings, partly offset by wage hikes. The FY27 margin target of 15% remains unchanged, with TECHM within reach of this goal. Further, gross margin expansion is expected through AI-led productivity gains in fixed-price and managed services engagements, delivery-effort rationalization, and employee-pyramid optimization. We believe margins are expected to continue expanding beyond FY27 and model a 15.1%/15.3% EBIT margin for FY27/FY28.

* Growth remains broad-based across verticals, with BFSI recovery awaited: Communications growth was supported by the Orange deal ramp-up, while retail, travel, and logistics continued to benefit from new deal wins and account expansion. BFSI grew 5.4% YoY CC, below the 8%+ YoY CC growth reported in the preceding two quarters, although a return to higher growth is expected from next quarter onwards. Additional leadership and team changes have been undertaken to improve execution in BFSI.

* Deal wins support revenue visibility over the coming quarters: TCV stood at USD1.02b in 2QFY27 (+25.4% YoY), taking TTM deal wins to USD4.27b (+34.8% YoY). Deal wins were spread across verticals and geographies, and the communications pipeline remains supported by large deal pursuits, with recent wins expected to scale over the next few quarters.

Valuation and change in estimates

* The ongoing turnaround under the new leadership continues to track well, and this quarter was another step in the right direction as TECHM is within reach of its FY27 EBIT margin goal of 15%. We believe the company could emerge as the growth leader among the large-cap peers and continue to like the bottom-up turnaround story.

* We build in ~7% USD CAGR over FY26-28E for TECHM, reflecting stronger-thanexpected execution, healthy deal ramp-ups, and improving growth visibility. We also build in 15.1%/15.3% EBIT margin estimates for FY27/28, implying a 20bp/50bp expansion against our earlier margin estimates. However, FY27 EPS estimates are slightly lower, reflecting a higher-than-expected ETR of ~30% in 2Q on the back of a one-time tax adjustment relating to prior periods. We value TECHM at 20x FY28E EPS with a revised TP of INR1,950 (18% upside) and reiterate our BUY rating. TECHM remains our preferred pick among large-cap IT companies.

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