- Revenue beat expectations by 4.1% and grew 8.3% YoY.
- EBIT margin jumped to 13.1% driven by fixed‑price projects and higher utilization.
- European business surged 11.2% YoY, hinting at a new growth frontier.
- One‑time wage‑code provision trimmed net profit QoQ, but YoY profit still up 14.1%.
- Target price set at INR 1,805; rating trimmed to “ACCUMULATE” after sharp rally.
You missed Tech Mahindra’s earnings surprise, and your portfolio may be paying for it.
Why Tech Mahindra’s Revenue Beat Signals a Shift in Indian IT
Tech Mahindra posted INR 1,43,932 million in revenue for the quarter, a 2.8% QoQ rise and an 8.3% YoY gain, comfortably beating consensus forecasts. The upside came from a broad‑based uplift across communications, manufacturing, and retail verticals. For investors, this signals that the company’s diversified client base is finally translating into top‑line resilience, a crucial factor as macro‑economic headwinds continue to strain pure‑play software firms.
Margin Expansion: What the 13.1% EBIT Margin Means for Future Profitability
EBIT surged to INR 18,919 million, up 11.3% QoQ and 40.1% YoY. More strikingly, the EBIT margin expanded to 13.1%, well above the industry average of roughly 11% for large Indian IT players. The drivers were three‑fold:
- Fixed‑price project productivity: Fixed‑price contracts lock in higher gross margins when execution efficiency improves.
- Volume growth: Higher billings without a commensurate cost increase.
- IT utilization rose to 86.6%, indicating better workforce deployment and less bench time.
Higher margins give the firm more leeway to reinvest in high‑margin services like cloud, AI, and cybersecurity, which are the next profit engines for the sector.
European Market Surge: A Blueprint for Global Growth
The European segment grew an impressive 11.2% YoY. This region has traditionally been a slower‑moving market for Indian IT outsourcers, but recent digital‑transformation pushes in Europe are opening doors for telecom and manufacturing players—Tech Mahindra’s core expertise. If the company can replicate this growth trajectory, the European contribution could lift the overall revenue mix from its current 84% IT focus toward a more balanced global exposure.
Project 40s Efficiency Program: The Hidden Engine Driving Costs Down
Management highlighted the “Project 40s” efficiency initiative as a key catalyst for the margin lift. The program targets a 40% reduction in non‑value‑added activities across delivery centers, focusing on automation, standardization, and talent upskilling. Historically, similar efficiency drives at peers (e.g., Wipro’s “Digital 2025” plan) have delivered 150–200 basis‑point margin accretion over two years. If Tech Mahindra’s roadmap holds, we could see EBIT margins nudging toward the high‑teens by FY27.
How Competitors Like Tata and Adani Are Reacting
While Tech Mahindra rides the European wave, Tata Consultancy Services (TCS) is deepening its foothold in North America, and Adani’s nascent IT arm is still focusing on renewable‑energy‑related digital services. Neither competitor has shown comparable European growth, giving Tech Mahindra a temporary first‑mover advantage. However, the competitive landscape is fluid; a strong TCS push into Europe could compress margins if price competition intensifies.
Historical Parallel: 2018 Earnings Spike and Its Aftermath
Tech Mahindra experienced a similar earnings beat in FY18, driven by a surge in telecom services. The stock rallied 30% over six months, only to correct when the telecom market softened. The lesson: earnings beats can be short‑lived if they are tied to a single vertical. This time, the diversification across communications, manufacturing, retail, and a booming European segment reduces the risk of a sector‑specific reversal.
Investor Playbook: Bull vs. Bear Cases for Tech Mahindra
Bull case: Continued European expansion + full realization of Project 40s efficiencies could lift EBIT margins to 15% by FY27, pushing earnings multiples higher. A 20% upside to the INR 1,805 target price becomes plausible.
Bear case: The one‑time wage‑code provision signals potential regulatory headwinds that could recur. If European growth stalls and competition intensifies, margins could revert to the low‑11% range, capping upside and justifying the “ACCUMULATE” stance.
Given the stock’s recent run‑up, a prudent approach is to add on dips, keeping an eye on quarterly utilization trends and European order flow. For risk‑averse investors, a small allocation within a diversified IT basket can capture upside while limiting exposure to company‑specific volatility.