Tech Mahindra Q2 Results Review - Telecom, BFSI Verticals See Slight Uptick: Systematix

Systematix Research Report

Tech Mahindra Ltd.'s Q2 FY25 revenue and margin surpassed our expectations, with revenue rising 0.7% in constant currency and 1.9% in USD terms, QoQ. U.S. markets were weak while Europe and rest of world drove growth.

The company negated any material change in the Q2 demand environment versus Q1. The communications vertical improved sequentially for the first time in six quarters, as seen from the 1.7% YoY decline in Q2 FY25 versus the 12.4% decline in FY24, a significant change that indicates signs of recovery.

Management believes although the sector may continue to see near term stress, vendor consolidation and revenue revival in B2B and B2C for telcos could restore spending in the vertical over the long term. Management aims to gain from cost optimisation initiatives, currency tailwinds, and lower subcontractor costs, which aided margins in Q2.

It expects to focus on margin expansion as against large deals, which it believes would hover at $600 million-800 million in the near term. The company aims to reinvest 1.5% of its margins into long-term investments, which are poised to be slightly heavier in H2 FY25.

We estimate 6.2% compound annual growth rate in USD revenue over FY24-26E (versus 4% earlier). We have revised our FY25E/FY26E Ebit margin and earnings estimates by 60 bps/30 bps to 11.7%/4.5%, respectively, based on better than-expected H1 performance and optimistic demand outlook.

Tech Mahindra has been trading at high-teen valuation over the last 10 years on average. Given the sharp run-up in stock price (more than 35% since the low of June 04, 2024), Tech Mahindra now trades at an unreasonable 35x+ one year forward PE, in our view, despite the weak outlook in its two key verticals and total contract value hovering at ~$600 million.

We maintain Sell on Tech Mahindra, with a target price of Rs 1,057 (Rs 1,010 earlier), valuing the company at similar 16 times FY26E EPS.

Material improvement in the communications and BFSI sectors, superior TCV numbers and margins are key upside risks.

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