HDFC Securities Pick of the Week 07th Dec'25: Tech Mahindra Ltd

HDFC Securities has selected Tech Mahindra Ltd. (NSE: TECHM) a global IT consulting, software engineering, and digital transformation services company as its Pick of the Week. With a base case fair value of Rs 1,710 and a bull case fair value of Rs 1,815 over the next 2-3 quarters, HDFC Securities recommends buying the stock in the Rs 1,555-1,590 band and adding on dips at Rs 1,420-1,450. The company’s strong presence across communication, cloud, 5G, and AI-led transformation positions it for steady medium-term growth despite short-term macro uncertainties.

Q2FY26 Result: Margin Expansion Continues, Deal Pipeline Strengthens

Tech Mahindra delivered another stable quarter, extending its margin improvement streak to seven consecutive quarters aided by operational efficiency and disciplined execution.

• Revenue: ₹13,995 crore, up 5.1% YoY and 4.8% QoQ.
• USD Revenue: $1,586 million, up 1.4% QoQ; constant currency growth at 1.6% QoQ.
• EBIT: ₹1,699 crore, up 15% QoQ and 32.7% YoY; EBIT margin improved to 12.1%.
• Net Profit (PAT): ₹1,202 crore, up 6.5% QoQ; PAT margin at 8.6%.
• Deal TCV: $815 million, up 35% YoY, with strong traction across US and APAC markets.
• Headcount: 152,714 employees; IT attrition at 12.8%, remaining among the lowest in the sector.

Growth was led by the US market, while Europe remained softer due to client-specific challenges expected to stabilise in the second half. Strong execution in fixed-price projects and SG&A optimisation supported margin gains.

Strategic Growth and Key Drivers

1. Leadership in 5G, Telecom & Network Services

   • Tech Mahindra remains one of India’s strongest IT players in the communication and network services space, with the CTME vertical contributing ~46% of revenue.
   • With the rapid adoption of 5G across global enterprises, the company is optimally positioned to capitalise on network modernisation, automation, and cloud-native deployments.
   • Vendor consolidation opportunities in US and European telecom operators could further strengthen deal momentum.

2. Strong Deal Pipeline and Client Mining

   • Deal TCV of $815 million signals healthy demand, and management expects quarterly TCV to gradually move towards $1 billion.
   • Client additions remain robust with 21 new clients in H1FY26, and 17 accounts crossing $1 million in annual revenue.
   • Large-deal activity remains vibrant, with US and APAC driving traction; discretionary spending recovery could accelerate revenue conversion.

3. Margin Expansion via Project Fortius

   • The company’s multi-year margin improvement program, Project Fortius, continues to enhance productivity and improve delivery mix.
   • Levers such as fixed-price contract efficiency, lower subcontracting, SG&A reduction, and pricing discipline are expected to help Tech Mahindra reach 15% EBIT margin by FY27E.
   • Utilisation and onsite-offshore mix optimisation remain key operational focus areas.

4. Deep AI & GenAI Capabilities

   • Tech Mahindra has built a strong AI foundation, including an LLM covering 38 Indian languages, an enterprise-scale GenAI studio, and 300+ deployed AI agents.
   • Its partnership with NVIDIA strengthens capabilities in Agentic AI, providing autonomous workflow solutions to global enterprises.
   • The new token-based pricing model could structurally improve margins over the long term.

5. Strong Financial Profile & Liquidity

   • Cash and cash equivalents stood at $821 million, providing robust flexibility for future acquisitions and investments.
   • Interest coverage remains healthy at 18.7x, and overall gearing at 0.1x underscores a strong balance sheet.
   • Stable cash flows and consistent dividend payouts support shareholder returns.

Valuation & Recommendation

HDFC Securities’ Estimates:

• Base Case Fair Value: ₹1,710
• Bull Case Fair Value: ₹1,815
• Time Horizon: 2–3 quarters

Recommendation: 

• Buy in the range of ₹1,555–1,590 and add on dips at ₹1,420–1,450.
• Strong deal momentum, sustained margin expansion, leadership in telecom transformation, and deepening AI capabilities make Tech Mahindra an attractive medium-term investment.

Risks & Considerations

• Macroeconomic Uncertainty: Slow discretionary spending or delayed decision cycles may impact deal conversion.
• Currency Movement: Sharp INR appreciation may affect profitability.
• Telecom Exposure: High dependence on the communication vertical may pose a risk during downturns.
• Talent & Attrition: Rising attrition or technology skill shortages could affect delivery.
• Competitive Pressure: Intense competition from global IT peers may drive pricing pressure.

HDFC Securities’ View

Tech Mahindra combines steady revenue visibility from its communication-led portfolio with strong growth potential in AI, 5G, cloud, and digital engineering. With consistent margin expansion, robust deal pipelines, and a healthy balance sheet, the company is well-positioned for medium-term growth. Investors looking to benefit from global digital transformation, 5G rollout, and enterprise AI adoption can consider Tech Mahindra as HDFC Securities’ Pick of the Week.