Tech Mahindra on track to improve margin but macro challenges linger

Synopsis

Tech Mahindra shares have fallen nearly 10% in five sessions despite better-than-expected Q2 results. Analysts trimmed FY26–FY27 earnings and target prices amid delays in project ramp-ups, weak client spending, and global policy uncertainty impacting near-term margin improvement.

Tech Mahindra’s (TechM) stock has lost nearly 10% in five trading sessions after the country’s fifth largest IT exporter declared the September quarter numbers on October 14. The ET Infotech index remained flat during the period. The company’s lacklustre performance on the bourses was despite its better than expected financial numbers for the quarter. The stock is under pressure due to concerns over delay in project ramp ups and short term challenges pertaining to the US policy decisions on tariffs and H1B visa. Analysts have lowered the earnings expectations by 2-6% for FY26 and FY27 and have reduced the 12-month target price by 5-9% after the result announcement to factor in the concerns.

Over the past few quarters, the company under the leadership of Mohit Joshi who took charge as the CEO in December 2023, has shown consistent improvement in the operating margin (EBIT margin) and deal wins. The EBIT margin has expanded by 100 basis points sequentially to 12.1% in the September quarter. It has nearly doubled after hitting a low of 6.1% in FY24. The company has a target of achieving 15% margin by FY27. While it is on track, the headwinds in terms of delay in project rollouts and delay in discretionary spending by clients may reduce the pace of margin improvement in the near term. This has made the company’s task to meet the targeted profitability in another six quarters challenging. Therefore, a delay of a quarter or two in achieving the margin guidance cannot be ruled out.

The total contract value (TCV) of deal wins has also been improving since the June 2024 quarter. The company clocked $816 million in TCV for the latest September quarter compared with $809 million in the previous quarter and $603 million in the year-ago quarter. It had closed FY25 with a TCV of $2.6 billion compared with $1.9 billion in the prior year, reflecting the rising momentum in fetching new business.

Despite a bulging order book, TechM’s quarterly revenue collection has remained at around $1.6 billion over the past six quarters. This shows the impact of weak client sentiment on project ramp ups.

“The demand environment is uncertain because of the potential threat of recession from the world’s largest economies,” mentioned Axis Securities in a report, adding that the rising subcontracting cost and cross-currency headwinds may impact operating margins negatively. The broking firm has increased the revenue estimate for FY26 by a modest 1% to Rs55,669 crore but has reduced the net profit estimate by 2% to Rs5,096 crore, citing the near term challenges.

On average, analysts have reduced the 12-month price target for TechM’s stock by 7% to Rs1,651. The stock was traded at Rs1,448.3 at the end of Tuesday’s special trading session on the BSE, reflecting an upside of 14%.

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