Tech Mahindra: What can upset its apple cart

Mint

30-06-2025

The Tech Mahindra Ltd stock is up 17% in the past year, beating sector index Nifty IT's 7% returns. The optimism stems from the company's ongoing efforts to revive its financial performance, which has lagged tier-1 peers due to a different vertical mix.
Tech Mahindra has significant exposure to the communications vertical, which remains under stress. For competitors, a large part of their revenue comes from the relatively better placed banking, financial services and insurance sector.
Going by Tech Mahindra's latest management commentary, it is on track to achieve four key objectives by FY27. These are: revenue growth above peer average, an Ebit (earnings before interest and tax) margin of 15%, return on capital employed of over 30%, and return of more than 85% of free cash flow to shareholders.
True, the FY25 results indicate that Tech Mahindra is making gradual progress on select earnings parameters.But a weak global economic backdrop could further hamper discretionary IT demand, putting the management's confidence to test.
Tech Mahindra reported strong order wins with a total contract value of $2.7 billion, up 42.5% year-on-year. Deal wins were broad-based across key industries and markets, helping the company to diversify its portfolio. Tech Mahindra expects deal wins to be in a $600-800 million range per quarter.
'Despite strict governance on deals and programmes to get pricing increases, deal win velocity has increased. We believe that a successful turnaround is on the cards, leading to re-rating of multiples and an increase in Street earnings per share estimates," Kotak Institutional Equities said in a report dated 12 June.
Tech Mahindra has revamped its sales team and go-to-market strategy, aiming to expand the deal pipeline and improve win rates. The company has adopted a selective approach to ensure margin-accretive deals.
Margin improvement
Its Ebit margin expanded by 360 basis points to 9.7% in FY25. This was driven by operational efficiencies, savings from Project Fortius (a plan to achieve a 15% operating margin), and the discontinuation of low-margin business. In the March quarter (Q4 of FY25), the Ebit margin improved for the sixth quarter in a row to 10.5%, ahead of consensus estimates.
The management expects further margin improvement in FY26 with the help of the integration of portfolio companies, leading to a reduction in operational costs and increased utilisation.
On the other hand, revenue growth has been modest. In FY25, Tech Mahindra achieved year-on-year revenue growth of 0.3%. In Q4, constant currency revenue fell 1.5% sequentially, impacted by project delays with a hi-tech client, amid macroeconomic uncertainty.
On the Q4 earnings call, the management said although projects have not been cancelled, there have been deferrals and delays in decision-making.
According to a recent Citi report, the macro environment is getting tougher – while it is difficult to quantify the impact, the downside risks have increased and are likely to weigh on multiples.
'Revenue trajectory has seen some impact given the macro uncertainty and impact on discretionary spends; particularly, in verticals like autos and hi-tech," it said.
The global research house has a sell rating on the Tech Mahindra stock and warns of impact on Q1FY26 earnings from seasonality in Comviva, its digital solutions subsidiary.
Additionally, valuations are above historical levels. At FY27 price-to-earnings, the Tech Mahindra stock is trading at 22x, showed Bloomberg data. This is higher than the 10-year average of 21x and almost in-line with larger peers Tata Consultancy Services Ltd and Infosys Ltd.
Tech Mahindra is making the right moves that have helped it bridge the valuation gap with its peers. However, given the elevated macroeconomic uncertainty, the pace of execution is critical. Any miss on that front could mean a longer recovery path than the management's guidance.