Tech Mahindra · TECHM
Tech Mahindra is 0.2 point from its 15% margin goal, but the goal is for the whole year
A 12th straight quarter of wider margins brought the IT company close to its three-year goal, but the first half averaged 14.6%, so the second half must do better.
Published · Updated · Inve Research Desk
14.8%
EBIT margin last quarter, against a 15% full-year goal
Within 0.2 point of the goal for one quarter; with the first half at 14.6%, a 15% year needs about 15.4% from here on.
How they did last quarter
The margin widened for a 12th straight quarter and growth quickened to 7.2%; the first half's 14.6% still leaves the 15% goal to be earned.
- EBIT margin14.8%, up 0.4 point on the quarter and 2.6 points on a year earliervs Full-year goal: "full year FY '27 EBIT margin target of 15%"The first half averaged 14.6% on the audited figures, so the second half needs about 15.4%.
- Revenue growth, constant currency7.2% on a year earlier, to US$1,693 millionvs 6.6% in the June quarter; 0.6% for fiscal 2026Growth quickened even as accelerated work for a European carmaker, which lifted June, fell away.
- Return on capital employed31.2%, up 6.8 points on a year earliervs FY27 goal, April 2026: "get to 30% for next year"Above the goal in the quarter; the goal is for the full year.
Close to 15%, but the goal is an average for the year
Tech Mahindra's EBIT margin, the share of revenue left as operating profit after depreciation, rose to 14.8% last quarter, up 0.4 point from June and 2.6 points from a year earlier. It was the 12th straight quarter of wider margins, by the company's count, and it leaves the group within 0.2 point of the 15% it set for this fiscal year, the third and last of its three-year transformation plan.
The finance chief, Rohit Anand, credited higher volumes and savings from Project Fortius, the company's margin-improvement programme, partly offset by pay rises that began phasing in during the quarter. Chief executive Mohit Joshi said the company was "within 20 basis points of the margin aspirations that we had stated". The goal, though, is for the full year, and the company restated it that way on the call, saying it remains on track.
What a 15% year asks of the second half
The first quarter came in at 14.4%, so the first half averaged 14.6% on the audited consolidated figures. To reach 15% for the year, the second half has to average about 15.4%, provided its revenue at least matches the first half's. That is above the 14.8% just reported, the best quarter of the 12-quarter run. In July Joshi said: "For the year, I think 15 is a number we're comfortable with", and Anand said the fourth quarter would have to come in above 15%.
Management sees room to get there. Joshi expects normal seasonality in the second half, with no unusual furloughs. Anand said fixed-price contracts still offer significant room for efficiency, and that a margin gain of at least 3-4 points from rebalancing the mix of senior and junior staff has largely gone unused, because that experienced workforce has helped win work. Asked whether utilisation, the share of IT staff time billed to clients, was nearing its peak at 88.9% (84.4% a year earlier), Joshi said AI tools will free people from fixed-price projects and that gross-margin opportunities have not been fully tapped. Against that, Anand expects the European car programme to trim revenue by broadly another 0.5% this quarter.
Growth has picked up, led by telecom
Growth was slow last fiscal year, 0.6% in constant currency. It has since quickened: revenue was US$1,693 million last quarter, up 7.2% on a year earlier in constant currency, after 6.6% in June. Communications, a third of revenue, grew 9.5% as a large telecom network deal, which the company calls its O-RAN deal, and new engagements ramped up. Manufacturing fell 3.9% from June, after accelerated work on a European carmaker's programme in that quarter.
New business has been strong. Deal wins topped US$1 billion in each of the last four quarters, and the 12-month total of US$4,270 million was up 34.8%. Joshi said the telecom pipeline remains strong but that the business carries significant client concentration, and with it some volatility. Banking and financial services, the slowest of the main industries at 5.4% in constant currency by Joshi's figure, should return to the 8% or more of the two quarters before, he said.
Joshi says growth comes first from here
Asked whether the company might give up some margin for faster growth, Joshi said that in this third year of the plan the focus pivots to growth, profitable growth, and that he does not expect that to change in the next three-year plan. Faster growth, he said, also brings the operating leverage to widen margins, but the company will "never be in a situation where we will be either buying revenue or doing deals that create long-term damage for the institution". It is too early, he added, to commit to targets for the next plan before this one is met.
Anand set out the choice ahead. There is still room to expand the margin, he said, and how the company balances that against reinvesting in growth is something it will share when it presents its long-term plan.
The record: notes
Notes
Impact 2/5 Balance sheet Mixed
Free cash flow slipped to 81% of profit after tax last quarter
Free cash flow was US$135 million last quarter, 81% of profit after tax, down from US$237 million a year earlier. Days of sales outstanding, a gauge of how long clients take to pay, rose to 88 from 84 in June. Anand said new deals ramping up held cash back and that it will normalise next quarter. Over the first half, free cash flow was about 94% of profit after tax; a one-time tax charge for earlier periods lowered second-quarter profit.
“We reiterate our stance to maintain 90% to 100% free cash flow to PAT on a full year basis.”— Rohit Anand, CFO
Impact 2/5 Guidance Mixed
Tech Mahindra plans to start reporting AI revenue in the second half
Chief operating officer Atul Soneja said the company expects to begin reporting AI revenue with its disclosure for the second half of this fiscal year. It will count only client-funded work that can be reconciled to its financial records, kept apart from AI-influenced pipeline and internal productivity gains. He also said automation will reduce the effort needed for some existing services and may put pressure on revenue that is billed by effort.
“We expect to introduce AI revenue reporting as part of our H2 FY '27 disclosure and continue it on an ongoing basis”— Atul Soneja, COO