Tech Mahindra (NSE: TECHM) emerges as a compelling rebound story in India's IT sector, according to Kotak Institutional Equities' June 12, 2025 analysis. The research house maintains its BUY rating while raising the fair value target to Rs1,850 from Rs1,650, signaling 13% upside potential from current levels of Rs1,638. This bullish revision stems from operational discipline in deal pricing, systematic margin improvements through cost rationalization, and strategic AI integration across verticals. The report highlights a 49.4% YoY surge in Q4FY25 deal wins to US$798 million as evidence of accelerating momentum.

Four-Pillar Strategy Drives Margin Expansion

Contractual Discipline: Tech Mahindra has implemented military-grade governance, requiring delivery team approvals before deal signings. A centralized contract management unit now escalates pricing disputes directly to C-suite executives, preventing margin-dilutive agreements.
Portfolio Pruning: The COO's office maintains a watchlist of underperforming contracts across 18% of the portfolio. Management reports converting 40% of these problematic engagements into profitable operations through renegotiations or structured exits.

Pricing Power Activation: After benchmarking against global peers, the firm enforced contractual escalation clauses to secure 5-7% rate hikes on legacy contracts. This initiative contributed 150 basis points to FY25 EBIT margins.

AI-Driven Efficiency: The "Agentic AI" platform reduced manual testing efforts by 35% in communication verticals while maintaining 98.6% accuracy through human-in-loop validation systems.

Financial Reengineering Creates Valuation Catalysts

Kotak's revised discounted cash flow model incorporates three key drivers:

The analysis projects EPS compounding at 25% CAGR through FY27, driven by margin expansion rather than top-line growth. This justifies the upgraded target multiple of 22X forward earnings versus sector average of 18X.

Risk Matrix: What Could Derail the Thesis?

Integration Challenges: Full consolidation of Comviva and other acquired entities remains incomplete, with legacy system migrations posing 15-18 month execution risks[1].
Talent Retention: While overall attrition stabilized at 11.8%, niche skill groups in AI/ML architecture show 22% churn rates that could impact delivery capabilities.

Geopolitical Pressures: European operations contributing 25.4% of revenues face potential headwinds from proposed EU data localization laws requiring $40-50 million compliance investments.

Technical Setup and Trading Strategy

The stock exhibits a bullish inverse head-and-shoulders pattern on weekly charts, with: - Neckline breakout at Rs1,720 - Measured move target: Rs1,920 - Stop loss: Rs1,575 (200-day moving average)
Options data reveals concentrated open interest at Rs1,700 calls for June expiry, suggesting institutional accumulation. Kotak advises staggered entry:

50% allocation at current Rs1,638

30% on pullback to Rs1,610-1,615 zone

20% contingent upon weekly close above Rs1,665

The Final Calculation: Margin of Safety Justifies Conviction

At 20.9X FY27 earnings versus Infosys' 24.3X, Tech Mahindra trades at a 14% sector discount despite superior margin expansion potential. The Rs1,850 target implies 18% total return including dividend yield, presenting an asymmetric risk-reward profile for patient capital.