Tech Mahindra is on track to improve margins, but macro challenges remain

Shares of Tech Mahindra (TechM) have fallen nearly 10% in five trading sessions after the country’s fifth-largest IT exporter announced September quarter results on October 14. The ET Infotech index remained flat over the period. The company’s lackluster performance on the stock markets was despite better-than-expected financials for the quarter. The stock is under pressure due to concerns about delays in project start-up and near-term challenges related to US policy decisions on tariffs and H1B visas. Analysts cut FY26 and FY27 earnings estimates by 2-6% and lowered the 12-month price target by 5-9% after the results announcement to take into account the concerns.

Over the past few quarters, under the leadership of Mohit Joshi, who took charge as CEO in December 2023, the company has shown consistent improvement in operating margin (EBIT margin) and deal wins. The EBIT margin increased by 100 basis points to 12.1% in the September quarter. This has almost doubled from a low of 6.1% in FY24. The company aims to achieve a margin of 15% by FY27. While the company is on track, headwinds in terms of delays in project rollouts and delays in discretionary spending by customers may reduce the pace of margin improvement in the near term. This makes it a challenge for the company to achieve the targeted profitability over another six quarters. Therefore, a delay of a quarter or two in achieving the margin target cannot be ruled out.

The total contract value (TCV) of closed deals has also improved since the June 2024 quarter. The company recorded $816 million in TCV for the final September quarter, compared to $809 million in the previous quarter and $603 million in the year-ago quarter. It had ended FY25 with a TCV of $2.6 billion, compared to $1.9 billion in the previous year, reflecting increasing momentum in acquiring new customers.

Despite a bulging order book, TechM’s quarterly revenue has remained at about $1.6 billion over the past six quarters. This shows the impact of weak customer sentiment on project start-up.

“The demand environment is uncertain due to the potential threat of recession from the world’s largest economies,” Axis Securities said in a report, adding that rising subcontracting costs and cross-currency headwinds could negatively impact operating margins. The brokerage firm has raised its FY26 revenue estimate by a modest 1% to Rs55,669 crore, but cut its net profit estimate by 2% to Rs5,096 crore, citing near-term challenges.

On average, analysts have cut the 12-month price target for TechM’s stock by 7% to Rs1,651. The stock was trading at Rs 1,448.3 at the end of special trading session on the BSE on Tuesday, reflecting a rise of 14%.