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Tech Mahindra Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤20th Jan 26

Summary : Tech Mahindra delivered strong Q3 FY26 results with record deal wins and significant margin expansion, driven by strategic focus on large clients and AI, positioning for above-peer growth despite some vertical-specific volatilities.

Management Perspective positive : Management expressed strong confidence in Q3 performance, highlighting record deal wins, margin expansion, and strategic initiatives. They reiterated their FY27 goals and bullish outlook for key verticals and client segments, despite acknowledging some near-term volatilities.

Concall Report Analysis & Insights

Business Overview

  1. Q3 FY26 revenue grew 2.7% YoY and 1.5% QoQ on a reported basis, marking the fastest quarterly growth in three years.
  2. Operating margins expanded by 290 basis points YoY to 13.1%, reflecting improved operating disciplines and revenue mix.
  3. Achieved highest quarterly deal bookings in five years at $1.096 billion, a 48% YoY growth on an LTM basis.
  4. Secured a strategic $500M+ multi-year deal with a leading European telco for application modernization.
  5. Added three $50 million clients and saw revenue from $20 million+ clients significantly outpace the company average.

Future Growth Prospects

  1. The communications vertical is well-positioned for growth into 2027, supported by a large European deal win.
  2. BFSI growth is expected to follow a steady trajectory in coming quarters as seasonal factors normalize.
  3. AI is a key growth pillar, with client programs shifting from pilots to scaled multi-year initiatives.
  4. Management aims to grow higher than the peer average by the end of FY27, with confidence in large client growth.
  5. Manufacturing, Retail/CPG/Travel/Logistics, and BFSI are expected to be key growth drivers.

Management Insights

  1. "We are starting the calendar year on a very positive note; the 3rd Quarter has delivered a strong performance."
  2. "Our deal wins this quarter stand at $1096 million, including the large deals shared earlier. This represents a robust 48% year-on-year growth."
  3. "We are consistently growing in that pool [clients >$20M revenue]. And that really reflects why we are so much more confident about our financial performance."
  4. "We have continued to stay very disciplined from our pricing and from our profitability perspective. And while obviously, large deals involve execution challenges that could dilute margins, we have not upfront signed a money-losing deal, we will not do that."
  5. "Over the last 21 months, we have really focused on strengthening the fundamentals of our business, investing in the right capabilities, building scalable platforms, sharpening our go-to-market execution, and creating a resilient operating model."

Signs of Skepticism

  1. Management did not provide specific quantitative AI metrics, citing difficulty in defining a credible, auditable measure.
  2. The exact timing and impact of the new wage code on wage hikes remain undecided and are under study.
  3. While confident in FY27 growth, management refrained from giving a specific revenue growth number for the next fiscal year.
  4. The long-term FY30 vision was mentioned but no specific details or strategic changes were shared yet.

Risk Factors

  1. BFSI vertical experienced higher-than-usual furloughs and productivity pass-throughs impacting revenue.
  2. The hi-tech sector is expected to remain volatile due to client cost pressures and cautious IT spending.
  3. Seasonal ramps in European automotive, which boosted Q3, will not recur in Q4, creating a near-term headwind.
  4. Implications of the new wage code notification on wage hikes are still being studied.
  5. Deal pipeline can be lumpy, leading to quarter-on-quarter fluctuations in deal wins.

Good To Know

  1. The company marked its 39th anniversary with a brand refresh, reinforcing its AI-led capabilities and innovation positioning.
  2. Tech Mahindra was recognized as a Global Sustainability Leader, regaining the #1 position in the S&P Global Dow Jones Sustainability Index.
  3. Launched a new culture model, 'Limitless Together,' to enhance employee value proposition and foster teamwork.
  4. Signed an MoU with the University of Texas at Dallas for AI-led innovation and launched the First Makers Lab in the U.S.
  5. Free cash flow to operational PAT stood at 123% YTD, with DSO decreasing by four days QoQ.

Key Drivers

  1. Record deal wins boost future revenue.
  2. AI adoption drives transformation projects.
  3. Margin expansion improves profitability.
  4. Strong client relationships ensure stickiness.

Key Analyst Discussions

Competitive Environment

  1. Analysts asked about vendor consolidation trends in BFSI and how Tech Mahindra is positioned.
  2. Questions were raised about the company's ability to capture market share in the comms vertical amidst overall sector spend.

Market Trends & Consumer Behavior

  1. Inquiries focused on the outlook for the manufacturing vertical, particularly auto and aerospace segments.
  2. Analysts asked about the overall improvement in discretionary demand and its impact on FY27 growth prospects.
  3. Questions were raised about the near-term impact of credit card interest rate caps on the BFSI business.

Financial Highlights

  1. Analysts questioned the sustainability of gross margin expansion and future drivers.
  2. Inquiries were made about the potential for annual new business TCV to reach $3.5-$4 billion.
  3. Questions arose regarding Q4 seasonality and its potential impact on revenue and margins.
  4. Clarification was sought on the breakdown of Q3 margin expansion drivers (operational efficiency, currency).

Product Composition

  1. Analysts asked about the growth drivers and potential risks in the BPS segment, especially concerning AI adoption.
  2. Questions were posed about the company's strategy for AI portfolio metrics and how to measure AI opportunity.

Strategic Considerations

  1. Analysts sought clarity on which verticals, besides telecom, would drive the ambition to grow higher than peer average by FY27.
  2. Questions were asked about the long-term vision beyond FY27 and potential changes in strategy or growth acceleration.
Tech Mahindra Ltd (TECHM) Concall Report Analysis & Insights | Dhanarthi