Tech Mahindra shares saw a significant jump of 8% on Friday following the release of its September-quarter (Q2FY27) results. The IT services company reported strong revenue growth, notable margin expansion, and robust new deal wins, which collectively boosted investor confidence among investors.
Q2 Performance Highlights
The company's revenue grew 7.2% year-on-year (YoY) in constant-currency terms, reaching $1.693 billion. This growth was primarily driven by strong performances in the communications, retail, travel, and logistics sectors, despite a sequential decline in manufacturing. A key highlight was the expansion of its Earnings Before Interest and Tax (EBIT) margin to 14.8%.
Tech Mahindra also secured new deal wins totaling $1.02 billion in Total Contract Value (TCV), representing a 25.4% YoY increase and marking the fourth consecutive quarter of deal wins exceeding the $1 billion mark.
Brokerage Reactions and Outlook
The Q2 results elicited mixed reactions from brokerage firms. Systematix maintained a "Buy" rating with a target price of Rs 1,900, while Choice Institutional Equities reiterated an "Add" recommendation, setting a target of Rs 1,775. In contrast, Nirmal Bang Institutional Equities held onto its "Sell" rating and a target price of Rs 1,222, citing ongoing challenges in sustaining revenue growth and margin expansion amidst the evolving dynamics of the AI-led industry.
Factors Driving Margin Expansion
The improvement in EBIT margin, which saw a 40 basis points quarter-on-quarter and 260 basis points YoY increase, surpassed both Nirmal Bang's and consensus estimates. This positive trend was largely attributed to volume growth and cost savings achieved through "Project Fortius." However, these gains were partially offset by recent wage hikes. Management reaffirmed its target of a 15% EBIT margin for the full FY27.
Adjusted Profit After Tax (PAT) Details
Despite the strong operating margin performance, the adjusted profit after tax (PAT) came in at Rs 1,609.7 crore, falling short of Nirmal Bang's estimate by 6.9% and consensus by 2.4%. This discrepancy was primarily due to an effective tax rate of 29.9%, which included a one-time adjustment related to prior-period tax matters. Excluding this adjustment, the tax rate would have been 26.6%.
Bonus Issue Recommendation
In a significant announcement, Tech Mahindra's board has recommended a 1:1 bonus issue, pending shareholder approval. This proposal means eligible shareholders will receive one new fully paid-up equity share for every existing share held. The bonus shares will be issued by capitalizing various company reserves, marking the first such bonus issue since March 2015.