Prabhudas Lilladher has upgraded Tech Mahindra to 'Accumulate' from 'Hold' and set a target price of ₹1,860, citing strong operational performance and encouraging deal momentum. The brokerage has increased its valuation multiple to 21x from the earlier 19x, reflecting improved confidence in the company's growth trajectory.

Strong Quarterly Performance Drives Upgrade

Tech Mahindra delivered robust revenue growth of 1.7% quarter-on-quarter in constant currency terms, significantly exceeding Prabhudas Lilladher's estimate of 0.5%. The performance was driven by strong momentum in the Communications vertical, which grew 2.8% QoQ, along with seasonal ramp-up in the Europe automotive segment.

The growth was broad-based across most verticals, with the notable exception of BFSI, which declined 6.3% due to passing productivity benefits to clients. Importantly, growth beyond Communications was encouraging at 1.2% QoQ, marking the third consecutive quarter of growth.

Major Contract Win Strengthens Revenue Visibility

Tech Mahindra secured a significant 5-year strategic contract worth $500 million with a European telecom operator. This deal alone is expected to contribute approximately 1% to the company's topline growth. Management expressed confidence in sustaining momentum within the Communications vertical through FY27, backed by this substantial contract win.

The 9-month deal total contract value (TCV) reached $2.7 billion, representing a 44% year-on-year increase. This strong performance builds on the 42% YoY TCV growth delivered in FY25. The quarterly TCV run-rate of $800 million to $1 billion is expected to be sustained, which should be sufficient to achieve the company's aspiration of outpacing peer average topline growth.

Margin Improvement and Growth Projections

Prabhudas Lilladher believes the restructuring exercise has largely calibrated margins to a comfortable band, with the focus now shifting to executing large strategic wins. The brokerage expects cost optimization efforts to continue through project Fortius, while growth acceleration should provide operating leverage to scale margins by approximately 200 basis points year-on-year in FY27.

The brokerage has incorporated revenue growth projections of 1.0%, 5.5%, and 5.9% in constant currency year-on-year terms for FY26E, FY27E, and FY28E respectively. Margin improvements are expected to be 270 basis points, 200 basis points, and 50 basis points year-on-year for the same periods.

Investment Outlook

The upgrade to 'Accumulate' reflects Prabhudas Lilladher's positive outlook on Tech Mahindra's ability to sustain growth momentum and improve operational efficiency. The combination of strong deal wins, broad-based growth across verticals, and ongoing cost optimization initiatives positions the company well for sustained performance improvement in the coming quarters.

Tech Mahindra has reported robust third-quarter financial results, demonstrating strong operational performance across key business segments. The IT services major exceeded analyst expectations with comprehensive growth metrics, though certain one-time provisions impacted overall profitability during the quarter.

Financial Performance Overview

The company's quarterly financial metrics showcase significant improvement across multiple parameters:

Revenue performance exceeded estimates by 4.1%, driven by broad-based growth across communications, manufacturing, and retail verticals. The European market contributed significantly with an impressive 11.2% year-on-year growth, highlighting the company's geographic diversification strategy.

Operational Efficiency and Margin Expansion

EBIT margin expansion to 13.1% reflects the company's focus on operational excellence and pricing discipline. The sequential improvement in EBIT was supported by several key factors including improved operating disciplines, strategic pricing approaches, and ongoing benefits from the Project 40s efficiency program. Fixed-price project productivity improvements, volume growth, and enhanced IT utilization contributed to margin expansion, with IT utilization reaching 86.6% during the quarter.

Segment-wise Performance

Both major business segments demonstrated positive growth momentum:

The IT services segment maintained its dominant position while the BPS segment showed stronger sequential growth, indicating balanced performance across the company's service portfolio.

Impact of Exceptional Provisions

PAT declined 6.1% quarter-on-quarter despite strong operational performance due to a one-time exceptional provision of ₹2,724 million (USD 30 million). This provision was made in accordance with new wage code notifications, representing a regulatory compliance measure rather than operational weakness.

Analyst Outlook and Valuation

Deven Choksey has established a target price of ₹1,805 based on December 2027 estimates, applying a 23.0x valuation multiple. However, the rating has been downgraded from "BUY" to "ACCUMULATE" at current levels, citing the sharp run-up in stock price. The valuation basis has been rolled forward to reflect updated long-term estimates, suggesting confidence in the company's fundamental trajectory while acknowledging current market pricing dynamics.