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Why Tech Mahindra’s turnaround is still a distant dream
Summary
- Tech Mahindra’s transformation journey is showing progress, with improved margins and strong deal wins. However, challenges in the communications segment and margin pressures highlight the steep path to achieving long-term targets.
Tech Mahindra Ltd’s three-year transformation journey initiated under the leadership of CEO Mohit Joshi is making steady progress. The company is focusing on selective large deals and stringent cost controls to achieve its FY27 targets of a 15% Ebit margin and revenue growth above the industry average.
Over the past three quarters (Q4FY24-Q3FY25), Tech Mahindra has achieved 1.0% constant currency revenue compound quarterly growth rate (CQGR), compared to an average 1.6% decline seen in the preceding four quarters, according to JM Financial Institutional Securities Ltd. During this period, margins expanded by 280 basis points (bps).
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Despite facing currency headwinds and making investments, the December quarter (Q3FY25) Ebit margin improved by 60 bps sequentially to 10.2%, surpassing the consensus estimate of 9.7%, driven by operational efficiencies under Project Fortius.
Additionally, the total contract value of net new deal wins reached $745 million, marking a multi-quarter high and representing the fourth consecutive quarter of sequential growth in deal wins. Among these, three large deals were secured in the communications vertical. It noted that discretionary demand in this segment remains subdued, further deterioration is unlikely. The company remains optimistic about its deal pipeline and foresees incremental demand improvement in 2025 compared to 2024.
However, challenges persist. Wage hikes effective from January 1 may reduce margins by 100-150 bps in Q4. The management aims to offset this impact through continued cost optimization. Still, achieving significant margin expansion will depend on revenue growth rather than cost-cutting alone.
Notably, the communications segment, which accounts for 33% of Tech Mahindra's revenue, remains under pressure, posing additional challenges for the new leadership. In contrast, tier-1 peers benefit from significant revenue contributions from the BFSI vertical, which is showing signs of recovery.
Consistency in deal bookings also remains a concern. “Tech Mahindra’s new deal bookings in the last 12 months was at $2.4 billion, only slightly higher than HCL Technologies’ quarterly new deal bookings with HCL being only 2.2x Tech Mahindra’s revenue rate. The gradient of recovery is along expected lines, yet the ask remains steep," said HDFC Securities. The revenue trade-off for margin remains a base case in the medium term, HDFC Securities added.
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In summary, achieving the stated goals may take longer than anticipated. Nonetheless, the stock has rallied 34% in FY25, outperforming the Nifty IT index. Tech Mahindra’s valuation has now risen above its long-term average and is nearly on par with tier-1 peers. At FY26 price-to-earnings (P/E) of 27x, as per Bloomberg data, the valuation appears unattractive given the associated downside risks.
