Tech Mahindra shares climb 10% on CEO's FY27 roadmap; should you buy stock?

Shares of Tech Mahindra Ltd (TechM) rallied 10 per cent in Friday's trade despite the IT major's weak set of March quarter results. The stock gained as the new CEO Mohit Joshi announced his vision for FY27, with goals to outgrow peers in revenue growth and achieve EBIT margin of 15 per cent by FY27.

TechM is also aiming for a 30 per cent-plus ROCE profile and expects to return over 85 per cent of free cash flow (FCF) by FY27. The focus, Motilal Oswal noted, will be on scaling large accounts, winning multi-tower deals, driving synergies from past acquisitions, improving the cost structure, and achieving profitable and predictable growth.

The results of new strategy would be keenly watched before any re-rating, Motilal Oswal said as it remains on the sidelines saying the he current TechM valuations fairly factors in the uncertainties around growth and margin. This brokerage sees the stock at Rs 1,210.

Nuvama said while these targets are achievable, the steps needed to achieve them will incur significant near-term pain. This brokerage has trimmed its FY25 and FY26 earnings estimates by 1.5-2 per cent. It continues to rate TechM as ‘REDUCE’, with an unchanged target of Rs 1,000, valuing the stock at 16 times FY26E PE.

Shares of Tech Mahindra jumped 10 per cent to hit a high of Rs 1,309.10 on BSE.

Nirmal Bang said the reversion to the 15 per cent EBIT margin has been indicated to be in FY27 rather than in FY26 that it was pencilling in. "We were 200 bps higher than the consensus. However, this margin number is higher than the 13.9 per cent that the consensus is currently working with in FY27. Hence there could be EPS upgrades for FY27," it said.

A PE multiple expansion will offset EPS cuts, Nirmal Bang said as it suggested a target price of Rs 1,417 on the stock.

Tech Mahindra’s Q4FY24 results reflect the ongoing weak demand environment, leading companies to focus on improving margins through cost optimisation.

"However, the inability to decrease subcontracting expenses and lower utilization makes us wary of the company’s approach towards efficiently managing resources. The reduction in client spending has dented the company’s performance despite achieving healthy growth in deal signings during the quarter," said DK Mudaraddi, Research Analyst, StoxBox.

For FY25, the management looks forward to improvement in clients spending, which fuels optimism for a better revenue performance ahead, said Choice Broking.

"It is confident that their actions will lead to steady earnings growth in the coming years. As a result, we upgrade our rating to BUY while arriving at a target price of Rs 1,273 implying a P/E of 21x (modified) on FY26E EPS of Rs 61," the brokerage said.

Key monitorables going forward would include - FY25E sales growth & margin outlook, demand commentary related to 5G technology, ramp-up of new businesses, deal pipeline, client decision-making for the same, and strategy roadmap under the leadership of a newly appointed CEO.