Tech Mahindra Share Price Target Revised to Rs 1,250 by ICICI Securities with "Reduce" Ratings
ICICI Securities has maintained a REDUCE rating on Tech Mahindra with a revised target price of Rs 1,250, indicating a downside of about 13% from the current market price of Rs 1,445. While Tech Mahindra’s turnaround strategy shows early signs of progress with new client additions and improved deal wins, persistent macroeconomic headwinds and challenges in key verticals could slow momentum. Margins have improved despite wage hikes, and deal TCV has rebounded strongly, but revenue growth remains tepid. Overall, the stock’s valuation appears stretched given the uncertain growth trajectory and execution risks.
Turnaround Efforts Show Early Success but Growth Headwinds Remain
Key Turnaround Indicators: Tech Mahindra's transformation strategy has delivered positives, such as 15+ new BFSI logos, a 42.6% YoY jump in new deal TCV to USD 2.68 billion, and stronger strategic client additions. However, weak demand across communication and manufacturing sectors — together accounting for around 50% of revenue — poses serious challenges to sustaining this momentum.
Q4FY25: Revenue Pressure, Margin Stability
Revenue Performance: Q4FY25 revenue declined 1.5% QoQ in constant currency terms due to delays in BPS deal renewals, seasonality in retail, and softness in healthcare. Communication vertical managed marginal growth (+1% QoQ USD), while BFSI continued its positive trend (+2.4% QoQ USD).
Margins Hold Firm: Despite headwinds from wage hikes, Tech Mahindra posted an EBIT margin of 10.5%, aided by operational efficiencies, offshore effort mix improvement, forex gains, and project Fortius initiatives.
Deal Wins Signal Future Growth Potential
New Wins: Tech Mahindra achieved a quarterly deal TCV run-rate of USD 600–800 million, in line with the company’s internal targets. The total new deal TCV for FY25 rose by 42.6% YoY, offering some comfort about FY26 growth prospects despite ongoing macro challenges.
Efforts Toward Margin Expansion
Margin Levers: Management plans to push margins to 15% by FY27 through fixed-price project optimization, pyramid optimization, automation, offshore shift, and cost efficiencies. However, ICICI Securities notes that a 450bps margin expansion goal remains ambitious in the current environment.
Vertical-wise Trends: BFSI, Healthcare, and Communication
BFSI Gains: BFSI revenues grew 4.3% YoY USD in FY25, outperforming company averages. Tech Mahindra added key logos in payments, core banking, and wealth management sub-sectors, with strong deal wins leveraging the M&M network.
Healthcare Focus: Healthcare revenues rose 3.6% YoY USD, supported by increased tech spend across the sector. This vertical remains a future growth driver alongside BFSI.
Communication and Manufacturing Weakness: Communication vertical growth remains muted amid global telecom industry weakness. Manufacturing continues to face headwinds from the global auto industry slowdown, though the Chennai Manufacturing Xperience Center launch has started seeing good client traction.
Financial Summary and Key Ratios
| Metrics | FY25 | FY26E | FY27E | FY28E |
|---|---|---|---|---|
| Net Revenue (Rs mn) | 5,29,883 | 5,48,260 | 5,92,324 | 6,38,325 |
| EBITDA Margin (%) | 13.2% | 15.1% | 17.0% | 17.3% |
| Net Profit (Rs mn) | 43,076 | 52,201 | 62,056 | 70,469 |
| EPS (Rs) | 48.5 | 58.9 | 70.0 | 79.5 |
| RoE (%) | 15.7% | 18.9% | 21.5% | 22.7% |
Valuation and Stock Outlook
Current Valuation: Tech Mahindra trades at 23x FY25E earnings, slightly below its 5-year average +2 standard deviation multiple of 24.7x. Despite margin expansion and deal wins, ICICI Securities believes valuation is stretched relative to earnings growth expectations.
Target Price: ICICI Securities maintains a REDUCE call with a target price of Rs 1,250, implying a downside potential of around 13% from the current level of Rs 1,445.
Key Risks to Outlook
- Positive Macro Surprise: A faster-than-expected recovery in global macro conditions could accelerate Tech Mahindra’s growth across verticals.
- Market Share Gains: Success in expanding BFSI and healthcare verticals may boost overall revenue momentum.
- Currency Tailwinds: INR depreciation against USD could aid margins and profitability further.
Conclusion: Execution, Not Intent, Will Define Future Gains
Tech Mahindra’s management has outlined a well-structured recovery and margin improvement roadmap, and initial signs are positive with stronger deal momentum and operational efficiency. However, tough macro conditions, sector-specific weaknesses, and high valuation multiples warrant caution. Investors are advised to closely track execution milestones, BFSI/healthcare expansion, and margin trends before making aggressive commitments.
