Tech Mahindra

Tech Mahindra’s Q2FY25 results reflect an impressive performance, especially in margin expansion, driven by Project Fortius—a strategic cost optimisation initiative. Though premium valuation might be a cause for concern, the project pipeline and expansion initiatives should cheer the investors[EasyDNNnews:PaidContentStart]

Tech Mahindra is a prominent global player in the information technology (IT) services and consulting sector, renowned for its comprehensive suite of offerings that cater to diverse industries. Established in 1986 as a joint venture between Mahindra and Mahindra and British Telecom, the company has evolved significantly, particularly following its merger with Satyam Computer Services Limited in June 2013. Headquartered in Mumbai, Tech Mahindra operates across more than 90 countries, leveraging a workforce of over 158,000 professionals to deliver innovative, customer-centric digital solutions.

The company prides itself on its entrepreneurial spirit and commitment to environmental, social and governance (ESG) leadership. Tech Mahindra’s extensive service portfolio includes consulting, enterprise applications, business process services and advanced technologies such as artificial intelligence (AI), blockchain and cloud computing. The company operates through two primary business segments:

1. Information Technology (IT) Services This segment encompasses a range of technology services, including next generation services, cloud and infrastructure services, engineering services and digital enterprise applications. The segment focuses on highgrowth units such as cloud computing, data analytics and artificial intelligence (AI).This segment generated ₹442,831 million in revenue, representing 85.2 per cent of the total revenue for FY24.

2. Business Process Services (BPS) Formerly known as business process outsourcing (BPO), this segment provides back-office support, customer relationship management, and other business process solutions. The BPS segment contributed ₹77,124 crore, accounting for 14.8 per cent of the total revenue in FY24.

Client Base
Tech Mahindra boasts a diverse client base of over 1,000 active clients across various industries and geographies. The company has a strong presence among major telecom providers and is thelargest domain-agnostic IOP system integrator, having processed over 1 trillion messages annually. Its key clients include Tier 1 companies in the telecom, manufacturing and BFSI sectors. Tech Mahindra’s largest clients consume a higher number of service lines, particularly in sectors where the company has a longstanding presence. It actively strives to increase the average number of service lines consumed by its largest clients.

The company’s notable client achievements include:
1. Being selected by a leading UK network services provider to build, operate, support and manage their 5G network.
2. Being recognised as AWS partner of the year for telco provider.

FY24 Financial Performance
1. Revenue: Tech Mahindra’s FY24 revenue stood at ₹51,995 crore, representing a decline of approximately 3.9 per cent compared to FY23. The decline was primarily driven by headwinds in the communications sector, a key revenue stream for the company. However, the company witnessed growth in the manufacturing vertical and in focused APAC markets.

2. EBITDA: The consolidated EBITDA for FY24 was ₹49,645 crore, representing a margin of approximately 9.6 per cent.

3. Profit After Tax (PAT): Tech Mahindra achieved a consolidated PAT of ₹23,578 crore in FY24.

Industry Vertical Revenue Breakdown
Tech Mahindra’s FY24 revenue breakdown by industry verticals reveals a reliance on communications and media and entertainment, while the manufacturing sector is emerging as a significant growth driver.

1. Communications and Media and Entertainment: This sector contributed ₹191,672 crore in FY24, representing 36.9 per cent of the total revenue. Although it remains the largest revenue contributor, this sector experienced a decline compared to the previous year, signalling potential challenges for Tech Mahindra in this core market.
2. Manufacturing: The manufacturing sector demonstrated impressive growth, contributing ₹92,255 crore in FY24, accounting for 17.7 per cent of the total revenue. This robust performance highlights Tech Mahindra’s successful expansion into a high-growth industry.
3. Other Verticals: The remaining revenue was distributed across other sectors, collectively representing 45.4 per cent of the total revenue.
• Technology: ₹55,741 crore (10.7 per cent)
• BFSI: ₹83,211 crore (16 per cent) n Retail, Transport and Logistics: ₹42,339 crore (8.1 per cent)     
• Others: ₹54,737 crore (10.5 per cent).          

Geographic Revenue Breakdown
Tech Mahindra’s FY24 revenue, categorised by geographic regions, highlights the contribution of each market:

• Americas: Up to 51.8 per cent of Tech Mahindra’s FY24 revenue was generated from the Americas region.
• Europe: The European market contributed 24 per cent of the total revenue in FY24.
• Rest of the World: The remaining 24.2 per cent of revenue came from other regions, including the APAC region.

Q2FY25 Performance
Tech Mahindra continued its positive momentum in the first quarter of FY25:
1. Revenue: Tech Mahindra’s revenue reached ₹13,006 crore in the first quarter of FY25. This represents a 1 per cent sequential growth and a 1.2 per cent year-on-year decline.
2. Profitability: The EBIT margin reached 8.5 per cent, reflecting an improvement of 170 basis points year-onyear. The company experienced margin expansion for the third consecutive quarter.
3. Deal Wins: Tech Mahindra secured net new deal wins worth ₹5,048 crore, indicating a strong pipeline of future business.
4. Vertical Growth: Manufacturing and healthcare verticals demonstrated robust growth, with year-on-year increases of 6.4 per cent and 6.1 per cent, respectively. Revenue from the communications sector declined due to seasonality. The BFSI sector experienced softness due to market conditions.
5. Geographic Performance: North America and focused APAC markets contributed to revenue growth, aligning with Tech Mahindra’s strategic focus.

Project Fortius
Tech Mahindra’s Q2FY25 results show impressive growth, especially in margin expansion, driven by Project Fortius—a strategic cost optimisation initiative. The various initiatives outlined under this project include:
1. Cutting Average Resource Costs: By hiring fresh talent, Tech Mahindra is effectively reducing the overall resource costs. This long-term strategy is already yielding positive results on profitability.
2. Enhancing Offshore Strategies: The company is optimising offshore operations to leverage cost efficiencies. This approach reduces expenses while ensuring smooth delivery and high client satisfaction.
3. Minimising Subcontracting Reliance: Tech Mahindra is working to decrease its dependence on subcontractors, leading to better cost management and improved operational efficiency.
4. Boosting Sales Productivity: New initiatives are enhancing sales productivity across regions, resulting in better resource utilisation and significant cost savings.
5. Streamlining General and Administrative Expenses: The company is optimising general and administrative expenses through process improvements and automation, enhancing overall cost control.
6. Integrating Portfolio Companies: Efforts are underway to integrate acquired entities, which are expected to create synergies and drive additional cost savings.

These initiatives led to a margin expansion of 110 basis points in Q1FY25, with operating margins reaching 8.5 per cent. This positive trend continued into Q2FY25, marking three consecutive quarters of improvement. The management projects an average annual benefit of USD 250 million from Project Fortius, emphasising its role in achieving over 15 per cent EBIT margins by FY27.

Growth Triggers
1. Tech Mahindra is driving growth by focusing on high-growth industry verticals like manufacturing, engineering services, and healthcare and life sciences.
2. The company’s cost optimisation programme, Project Fortius, is significantly contributing to its profitability by streamlining operations and reducing costs.
3. Tech Mahindra’s targeted expansion in high-potential APAC markets like ANZ, Japan, Singapore and Indonesia is fuelling growth in the ‘rest of the world’ region.
4. The company is strategically shifting its service mix towards higher-margin offerings, including digital enterprise applications, engineering services, cloud and infrastructure services and next generation services, to enhance profitability.

Valuation
Tech Mahindra’s stock exhibits a high PE ratio of 51.8, significantly exceeding the industry average of 32.8 times, indicating investor confidence in future growth prospects. The market capitalisation per five-year average cash flow from operations ratio of 28.54 times further reinforces this sentiment. However, a high PEG ratio of 4.62 raises concerns about potential overvaluation relative to projected earnings growth.

Conclusion
Tech Mahindra offers a strong long-term investment opportunity, driven by its Project Fortius initiatives, which have already led to margin expansion. The company’s strategic shift towards high-growth verticals and digital services, along with solid deal wins, supports its future growth prospects. However, the premium valuation—with a high PE ratio of 51.8 times and a PEG ratio of 4.62—suggests that much of this optimism is already priced in, leaving limited room for execution errors. Despite these valuation concerns, we recommend BUY for long-term investors, as the company’s transformation and growth potential remain promising.

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