Tech Mahindra is preparing to launch a transparent, AI-specific metric within the next quarter to provide clearer insights into how artificial intelligence is being priced into business deals. The announcement comes as the IT services sector grapples with accurately measuring and communicating the value of AI integration in client engagements.

Speaking exclusively to CNBC-TV18 on the sidelines of the World Economic Forum in Davos, Managing Director and CEO Mohit Joshi criticized the current trend of reporting AI-linked revenue as more of a marketing exercise than a true reflection of value creation. The company is developing a clearer framework to help investors and clients better understand how AI influences deal economics.

Strong Q3 Performance and Turnaround Progress

Tech Mahindra delivered robust performance in the December quarter, demonstrating the effectiveness of its ongoing transformation strategy.

Joshi emphasized that the turnaround plan outlined to markets in 2024 remains firmly on track, supported by what he described as the best team in the industry. The company has demonstrated a remarkable recovery from being at the bottom of the growth curve in FY23 to outperforming peers in the most recent quarter.

Margin Targets and Strategic Focus

Despite challenging global conditions, Tech Mahindra maintains its commitment to achieving a 15% margin target for the year, which Joshi clarified refers to a full-year average. The company retains sufficient operational levers to protect margins while simultaneously shifting focus toward accelerating growth momentum.

The CEO highlighted the company's strategic positioning to grow above the industry peer-average growth range, marking a significant turnaround achieved in a relatively short timeframe.

Geographic Strategy and Market Positioning

Europe remains a crucial market for Tech Mahindra, particularly through its exposure to the automotive sector, which provides the company with a strong global footprint. However, telecommunications continues to represent the largest business segment, driven primarily by national and domestic demand dynamics rather than global trade flows.

Regarding global uncertainties, Joshi noted it remains too early to forecast the impact of potential tariff wars, emphasizing that trade conflicts benefit no economy. He observed improved client spending sentiment compared to the previous year, creating a more supportive demand environment.

AI as Strategic Opportunity

Joshi positioned artificial intelligence as a clear tailwind for the IT services industry, countering earlier concerns about AI being a potential headwind. He noted increased demand for experienced talent despite AI adoption, with India emerging as the largest pool of trained AI manpower globally.

Using telecommunications as an example, Joshi outlined major AI opportunities in transforming networks, customer relationships, and the B2B landscape. Tech Mahindra is strategically positioned to leverage these opportunities through:

• Building smaller language models
• Partnering with hyperscalers and AI providers
• Driving comprehensive client transformation initiatives

The company's deal win pipeline remains robust, reinforcing confidence in sustained growth momentum over the coming quarters and supporting the overall transformation strategy.

Tech Mahindra shares surged nearly 4% following the company's Q3 results announcement, which revealed strong sequential performance and record deal momentum. The IT services company reported better-than-expected revenue growth and significant margin expansion, prompting positive analyst reactions including a major upgrade from JPMorgan.

Share Price Performance

Tech Mahindra shares climbed 3.57% to ₹1,730.10, trading close to their 52-week high after the quarterly results announcement. The stock has gained close to 8% so far this year, with the rally driven by investor optimism over improved financial metrics and enhanced business outlook under CEO Mohit Joshi's leadership.

Financial Performance Overview

The company delivered robust performance in Q3, with revenue growth significantly outpacing estimates and margins showing sharp sequential improvement.

Revenue grew 1.7% in constant currency terms, comfortably beating analyst estimates of 0.6%. The EBIT margin improvement to 13.1% from 12.1% marked the ninth consecutive quarter of margin expansion, representing a sharp recovery from the low of 4.7% seen in Q2FY24.

Record Deal Momentum

Tech Mahindra achieved record deal wins during the quarter, with management highlighting that deal wins on a last-twelve-month basis were the highest achieved in the past five years. Total contract value reached $1,096 million, including a significant $500 million deal win in Europe within the communications vertical. The telecom segment, accounting for approximately 35% of total revenue, posted year-on-year growth of 4.6% in dollar terms, breaking a trend of contraction seen in nine of the last 10 quarters.

Analyst Upgrades and Target Revisions

JPMorgan upgraded Tech Mahindra to 'Overweight' from 'Neutral', raising its price target to ₹2,100 per share. The brokerage expects the company to post a relatively strong exit growth rate of 1.9%, which combined with mega deal ramp-ups, could help it match HCL Technologies and Infosys with around 6% growth in FY27E.

Following the improved outlook, JPMorgan raised its revenue estimates by 2-3% and margins by 30-70 basis points, resulting in EPS upgrades of 3-8% over FY26-28E. The brokerage also increased its target valuation multiple to 24x from 20x, citing stronger and more sustainable growth prospects.

Business Outlook

Management reiterated its aspiration to reach 15% EBIT margins by FY27, alongside industry-leading growth. The communications vertical showed signs of recovery, with analysts expecting the company's growth trajectory to provide incremental operating leverage supporting the margin target. The turnaround is expected to be supported by rising AI-led spending and enhanced deal conversion capabilities.