Buy Tech Mahindra Ltd for the Target Rs.2,000 by Motilal Oswal Financial Services Ltd
A step in the right direction
Telecom stabilizes, margin performance on track
* Tech Mahindra (TECHM) reported 1QFY26 revenue of USD1.6b, down 1.4% QoQ in constant currency (CC) vs. our estimate of 1.0% cc decline. Communications/Manufacturing grew 2.8%/4.0% QoQ. BFS/Retail were down 0.6%/1.0% QoQ. EBIT margin was up 60bp QoQ at 11.1%, beating our estimate of 10.7%. PAT stood at INR11.4b (down 2.2% QoQ/up 33% YoY), below our estimate of INR12b. In INR terms, revenue/EBIT/PAT grew 2.7%/34.0%/34.0% YoY. In 2QFY26, we expect revenue/EBIT/PAT to grow by 3.9%/31.0%/9.1% YoY. We reiterate BUY on TECHM with a TP of INR2,000 (implying 24% upside), based on 25x FY27E EPS.
Our view: On track despite few headwinds
* Revenue miss; communications now net positive - TechM's 1QFY26 revenue missed estimates due to continued weakness in manufacturing and clientspecific issue in Hi-tech. However, the Communications segment, which was a key overhang, is now net positive and should support revenue momentum going forward. Management highlighted BFSI and Communications as the key growth drivers, while Manufacturing is likely to remain under pressure. Our estimates factor in 1.0%/6.5% organic CC growth for FY26/FY27.
* Continuous margin expansion; guidance reiterated: Margins improved sequentially to 11.1% in 1QFY26, aided by better operational leverage and cost actions, which helped to offset the impact of visa costs and Comviva seasonality. The company reiterated its FY27 EBIT margin aspiration of 15%. Management has a clear plan in place, but we believe that if growth does not return in FY27, there could be some downside risk to margin estimates. That said, we retain our margin assumptions at 14.4%, allowing for some miss to management plans.
* Deal TCV growth best among peers: TechM continued to deliver decent deal TCV performance with deal TCV at USD809m, up 51% YoY. The growth was supported by better pricing, not taking a hit on margins. Large deals will complete the transition in 2Q and start contributing to revenue.
* Transformation on track: Healthy deal TCV, stability in the Communications vertical, continuous margin expansion, and the reiteration of guidance point to management’s execution in the right direction. While the FY26 margin expansion plan appears achievable even without a major industry recovery, hitting the 15% target in FY27 will likely require growth to return. That said, management has laid out a clear and credible plan—and our base case assumes it will deliver closer to its intended margin plan.
Valuation and change in estimates
* We keep our estimates unchanged, reflecting steady directional progress. We estimate FY26/FY27 EBIT margins at 12.3%/14.4%, which will result in a 28% CAGR in INR PAT over FY25-27. The ongoing restructuring under the new leadership is tracking well, and this quarter was another step in the right direction. We continue to like TECHM’s bottom-up turnaround story. We value TECHM at 25x FY27E EPS with a TP of INR2,000 (24% upside). We reiterate our Buy rating on the stock.
Miss on revenue, beat on margins; healthy deal TCV growth
* Revenue stood at USD1.6b, down 1.4% CC (up 1.0 QoQ % in USD terms) vs. our estimate of 1.0% QoQ CC decline.
* IT service/BPO were up 0.7%/2.9% QoQ. Americas and Europe grew 2.6%/3.6% QoQ.
* Communications/Manufacturing grew 2.8%/4.0% QoQ. BFS/Retail were down 0.6%/1.0% QoQ.
* EBIT margin was up 60bp QoQ at 11.1%, beating our estimates of 10.7%.
* Net employee addition was flat QoQ/YoY. Utilization (ex. trainees) was down 130bp QoQ at 85.0%. LTM attrition was up by 80bp at 12.6%.
* Net new deal TCV was USD809m, up 1.3% QoQ/51% YoY.
* Adj. PAT stood at INR11.4b (down 2.2% QoQ/up 33% YoY), below our estimate of INR12b.
* FCF conversion to PAT stood at 65% vs. 111% in 4QFY25.
Key highlights from the management commentary
* The environment remains dynamic and uncertain.
* TECHM has seen slowdown in Manufacturing, with cutbacks in discretionary spending. Telecom has stabilized.
* Management expects FY27 growth to exceed peer-group average. Management maintains that FY26 will be better than FY25.
* Large deals from 2Q are expected to complete transition and begin contributing to revenue, assuming stable conditions.
* Deal win momentum remains strong, supporting growth visibility for the next quarter.
* Management remains confident about achieving FY27 EBIT margin guidance.
* BFSI: Differentiation in asset management and payments. Strong capabilities in Guidewire and Temenos.
* Telcos: In the Americas region, spending has stabilized, and growth is expected to return.
Valuation and view
We remain positive about the restructuring at TECHM under the new leadership. But we expect the impact from these steps to be visible gradually. With the Communications vertical turning net positive, continued strength in BFSI, and improving operational efficiency, we see room for continued margin improvement ahead. We value TECHM at 25x FY27E EPS with a TP of INR2,000 (24% upside). We reiterate our BUY rating on the stock
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