Kotak Institutional Equities has reiterated a BUY recommendation on Tech Mahindra, setting a fair value target of Rs 1,850 per share. The report underscores a robust turnaround in the company’s operational metrics for FY2025, driven by strategic cost management, improved margin profile, and visible progress in acquisition integration. Investors are advised to consider the current price of Rs 1,624 as an attractive entry point, with the stock poised for further upside as operational levers continue to play out.

Tech Mahindra’s Turnaround Gains Momentum

Tech Mahindra’s FY2025 annual report analysis reveals a company in the midst of a meaningful transformation. The absence of one-off costs, disciplined personnel expense management, and ongoing acquisition integration have led to a significant expansion in EBIT margins. While legacy acquisitions continue to drag on consolidated growth, newer initiatives and operational optimizations are expected to drive future performance. The research house maintains a bullish stance, projecting a 14% upside from current levels, and highlights the stock’s compelling risk-reward profile for long-term investors.

Recommendation and Stock Levels

BUY Call Maintained by Kotak Institutional Equities

The research house retains a BUY rating on Tech Mahindra with a fair value of Rs 1,850, implying a potential 14% upside from the prevailing market price of Rs 1,624.

The valuation is based on 22x June 2027E earnings, reflecting confidence in the company’s turnaround and margin recovery trajectory.

Key Stock Levels for Investors

Current Market Price (CMP): Rs 1,624

Target Price: Rs 1,850

52-Week Range: Rs 1,209 – Rs 1,808

Dividend Yield: 2.4% (FY2025), rising to 3.2% by FY2027E

EBIT Margin Expansion: The Cornerstone of Recovery

Margin Expansion Driven by Cost Discipline

EBIT margin surged 360 basis points to 9.7% in FY2025, a marked improvement from the previous year’s 6.1%.

The absence of one-off provisions (notably for onerous contracts), lower bad debt costs, and reduced personnel expenses were the primary contributors.

A higher proportion of entry-level employees (up 200 bps to 27.8%), increased offshoring, and lower subcontracting costs further supported margin gains.

Outlook for Further Margin Expansion

Back-end integration of acquisitions is expected to yield additional savings in general and administrative expenses.

Continued optimization of the employee pyramid, offshoring, and subcontracting holds further potential for efficiency gains.

An increasing mix of revenue from new, higher-margin deals is anticipated to bolster profitability.

Employee Pyramid and Attrition Dynamics

Stable Employee Pyramid Amid Industry Volatility

The proportion of employees under 30 years remained steady at 47.4%, indicating a stable workforce structure despite sector-wide turbulence.

Tech Mahindra has maintained its employee pyramid more consistently than peers such as Infosys and TCS.

Attrition Trends Warrant Monitoring

Attrition rates ticked up slightly across all employee bands, with the highest churn in the junior category.

The company implemented a modest average wage hike of 4% in FY2025, lower than previous years, contributing to cost containment but potentially impacting retention.

Acquisition Integration: Progress and Pain Points

Integration Efforts Yielding Operational Synergies

The gap between consolidated headcount and the sum of standalone plus integrated acquisitions has narrowed, reflecting tangible integration progress.

Several acquired entities, including Eventus, BORN, Cerium, Zen3, and Thirdware, have been merged or liquidated, streamlining the group structure.

Goodwill from acquisitions has been reallocated to relevant business units, enhancing transparency.

Subsidiary Performance: Mixed Results

Revenues from several acquired subsidiaries, such as LCC, Target, HCI, and DigitalOnUS, continued to decline, offsetting growth in Comviva, Pininfarina, Activus Connect, and Perigord.

The actual performance may be understated, as some revenue is now booked under the parent entity post-integration.

Financial Snapshot and Valuation Table

Client Metrics and Business Mix Evolution

Client Concentration Decreasing

Revenue contribution from the top 5, 10, and 20 clients has gradually declined, indicating a more diversified client base and reduced dependency on a handful of large accounts.

Geographic and Sectoral Diversification

The Americas continue to account for over half of revenues, but Europe and Rest of World (RoW) have seen incremental gains.

Vertical mix is broadening, with communications, manufacturing, and hi-tech/media leading the charge.

Risks and Watch Points

Subsidiary Underperformance Remains a Drag

Legacy acquisitions, particularly LCC and Target, continue to face revenue and margin headwinds, necessitating ongoing restructuring and strategic review.

Wage Inflation and Attrition

While cost controls have aided margins, persistent wage inflation and rising attrition could pressure future profitability if not addressed proactively.

Investor Takeaways and Final Word

Tech Mahindra: A Turnaround in Progress

The company’s disciplined execution on cost and integration fronts has set the stage for sustained margin improvement.

With a clear path to further operational gains and a healthy pipeline of new deals, Tech Mahindra remains a compelling play in the Indian IT services sector.

Investors are advised to accumulate the stock at current levels, with a medium-term target of Rs 1,850 as set by Kotak Institutional Equities.