Analysts split on Tech Mahindra's growth prospects, see limited upside

Tech Mahindra's Q1FY26 profit up 33% YoY and deal wins rise 44% but analysts offer mixed views on growth prospects; stock down 3% on cautious outlook

Tech Mahindra reported a revenue of ₹13,350 crore for the April-June quarter of the financial year 2026 (Q1FY26), representing a decline of 1.4 per cent quarter-on-quarter (Q-o-Q) and down 1.0 per cent year-on-year (Y-o-Y) in constant currency (CC) terms.

 

On sequential basis in USD terms, the communications vertical was up 2.8 per cent Q-o-Q, BFSI (banking, financial services & insurance) was down 0.6 per cent Q-o-Q, manufacturing up 4.0 per cent Q-o-Q, hi-tech & media up by 1.3 per cent Q-o-Q, retail, transport & logistics down by 1.0 per cent and healthcare up by 0.1 per cent Q-o-Q.

 

Geography-wise, the Americas were up 2.6 per cent Q-o-Q, Europe up by 3.6 per cent Q-o-Q and the rest of world (ROW) down by 4.5 per cent Q-o-Q.

 

The EBIT margin increased 60 basis points (bps) Q-o-Q to 11.1 per cent. The profit after tax (PAT) was ₹1,140 crore (down 2.2 per cent Q-o-Q, up 33 per cent Y-o-Y), and in Rs terms, revenue grew 2.7 per cent, EBIT grew 34 per cent and PAT grew 34.0 per cent Y-o-Y. 

 

New deals with Total Contract Value (TCV) of $809 million were announced, up 44 per cent Y-o-Y. The headcount was down 214 Q-o-Q to 1,48,517 employees.

 

Attrition increased by 80 bps Q-o-Q to 12.6 per cent. Utilisation was down by 130 bps Q-o-Q at 85 per cent. The number of $50 million+ clients was at 26, up by one Q-o-Q.

 

 

Management says sentiment remains cautious, particularly in automotive. But key markets such as North America and Europe are showing sequential growth, supported by backlog and active pursuit of AI-led engagements. Management said that FY26 performance remained on track for full-year growth.

 

The focus remains on selective deal conversion and scaling differentiated offerings, including proprietary AI tools. Initiatives around automation, offshoring and integration are expected to contribute to margin improvement. For subcontracting expenses, management guides for a long-term range of 8-10 per cent.

 

Deal wins were broad-based across BFSI, retail, telecom, high-tech, and manufacturing. But Auto and hi-tech sectors face demand softness. BFSI and retail are future growth drivers while the telco vertical has stabilised. FY26 is expected to be better than FY25, but outlook is cautious due to macro volatility.

 

The target for EBIT margin of 15 per cent for FY27 remains intact implying 4 per cent improvement over two financial years. Margin expansion will be driven by offshoring, lower subcontracting, and operational integration. AI-led transformation is driving productivity and deal momentum and the offshore mix has increased significantly Y-o-Y.

 

The outlook for manufacturing is uncertain with longer-term tariff impact expected to hurt growth.

 

However, the communications (telecom) segment is now net positive and will support revenue momentum. Internally, talent transformation is ongoing with a focus on workforce for AI execution but the pyramid reshaping is gradual.

 

Deal conversion to revenue is expected to gain momentum from Q2 onwards. While deal intake is strong and margin expansion positive, sequential softness in BFSI and retail may be cause for concern. The cash flow (CF) conversion was low at 46 per cent Operating CF to EBITDA and Free CF conversion to PAT at 65 per cent in Q1FY26 versus 111 per cent in Q4FY25,

 

The good deal TCV during a difficult period due to macro headwinds is impressive and stability in the communications vertical removes a key concern. The steady margin expansion, and reiteration of guidance point to management confidence.

 

The stock lost almost 3 per cent to close at ₹1,563.50 on Thursday on the BSE following the results announcement post market hours on Wednesday. However, analysts are divided on prospects. The bull case assumes over 25 per cent upside after the correction. According to Bloomberg, 16 of the 36 analysts polled in the last two days (post Q1 results) are bullish on the stock, while the remaining 11 are bearish and 9 are neutral. Their average one-year target price for the stock is ₹1,647, indicating potential upside of about 5 per cent.