Tech Mahindra’s Q1 positives overshadowed by macro blues

The June-quarter results of Tech Mahindra Ltd had some bright spots. First-quarter Ebit margin rose sequentially for the seventh straight quarter, improving by 56 basis points (bps) to 11.1%, surpassing consensus estimates.

Also, a seasonally slow quarter for the company’s mobility solutions business, higher visa costs, and lower employee utilisation were offset by savings from TechM’s Project Fortius, favourable offshore mix, and optimisation of general and administrative expenses.

Offshore mix refers to information technology (IT) service providers allocating software development work to teams located in different countries, mainly for the purpose of saving costs.

As part of Tech Mahindra’s Project Fortius, the management has retained its margin target of 15% by 2026-27. The company aims to achieve the target within the timeline by consistently hiring fresh graduates, improving its employee utilisation rate, lowering subcontracting costs, higher offshoring, and competitive pricing.

“While the employee pyramid is similar in FY25 compared with FY24, TechM has done better than TCS (Tata Consultancy Services) and Infosys, despite weaker revenue performance,” analysts at Kotak Institutional Equities said in a report dated 16 July. “These elements and a few others will contribute to a sustainable elevated margin profile and narrowing gap in growth versus quality tier-1 peers.”

Tech Mahindra will decide on wage hikes and the quantum in the fourth quarter of FY26 (January-March 2026).

New deal wins were robust and broadbased across business segments. Total contract value (TCV) jumped 52% year-on-year to $809 million, boosted by two large deals worth $50 million each. That was TechM’s highest TCV in 13 quarters and the third consecutive quarter with over $700 million.

Tech Mahindra expects deal wins of $600-800 million every quarter. Deals are expected to start converting to revenue from the second quarter (July-August), with more expected in the second half of 2026, the management said.

Faster and timely conversion of deals is crucial for Tech Mahindra to meet its objective of achieving revenue growth above the peer average by FY27.

Macro challenges

Tech Mahindra’s constant currency revenue fell 1.4% sequentially in Q1, steeper than the estimated 0.8% fall. Revenue was hurt by continued weak discretionary tech spending by customers and delay in deal ramp-ups.

The macroenvironment remains uncertain with continued weakness in the automotive, hi-tech, and manufacturing segments, the management cautioned.

However, TechM’s telecom business surprised with 0.4% sequential revenue growth in a seasonally weak quarter, supported by stabilisation in spending from top clients.

But sustenance is crucial. Tech Mahindra has significant exposure to the communications sector (around 34% of revenue) that has been under stress lately, weighing on the information technology service provider’s revenue growth trajectory versus peers.

Despite the macro headwinds, Tech Mahindra expects FY26 revenue growth (in constant currency terms) to be better than FY25’s 0.3% rise. But that may be a tall ask.

“Considering the Q1 weakness, the ask-rate for the rest of the year to achieve flat FY26 CC (constant currency) growth is about 0.8% CQGR (compound quarterly growth rate), which we believe is a little challenging, given the underlying macro uncertainties,” PL Capital said in a report dated 16 July.

Tech Mahindra’s shares are up about 4% in the past year versus a drop in the sector index, Nifty IT. The company’s turnaround efforts are showing some progress, which has rewarded the stock. But weak globaldemand may delay meaningful benefits of this strategic overhaul. Tech Mahindra has seen modest earnings downgrades by some brokerages post its first-quarter results.

The stock trades at FY27 price-to-earnings multiple of 21x, showed Bloomberg data. “Despite inferior margins and returns profile, TechM trades at a valuation comparable to large-cap peers,” Nuvama Research said in a report dated 16 July.

However, it added: “Margin expansion will be even more difficult hereafter given the low-growth and weak macros and limited levers for expansion.”