'Reduce' Tech Mahindra Shares Retains PL Capital Post Q1 Results

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PL Capital Report

Tech Mahindra Ltd.'s revenue growth (-1.4% constant currency QoQ) was below our estimates (-1.0% CC QoQ), while margins were fairly in line with our expectations. Despite the sequential de-growth, the constructive recovery is visible in communication and retail, while BFSI continued its momentum in Q1. Communication (~34% of revenue) remains in a bright spot with a steady recovery in Telco despite the negative seasonality in Comviva.

Automotive within manufacturing remains a challenge, although it reported sequential improvement in Q1. The structural weakness within Automotive will continue to persistent for the rest of the year.

Considering the Q1 weakness, the ask-rate for the rest of the year to achieve flat FY26 CC growth is ~0.8% CQGR, which we believe is a little challenging, given the underlying macro uncertainties.

Although communication has improved, it is difficult to draw a trend, given the conversion on deal TCV also tends to be slower than anticipated.

However, we believe the cost optimisation efforts would continue at a similar pace of FY25 with continued efforts to rationalize employee pyramid and leveraging project Fortius.

We are baking in revenue growth of -1.2%/+3.4% CC YoY with margin improvement of 170bps/280bps YoY in FY26E/FY27E.

We assign 20x to its FY27E EPS, which translates to a target price of Rs 1,470. The stock is currently trading at 22x, leaving no potential upside. Retain, Reduce.

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