Research Reports on L&T Technology Services (LTTS IN) and Tech Mahindra (TECHM IN) by PL Capital

Tech Mahindra (TECHM IN)

Rating: REDUCE | CMP: Rs1,608 | TP: Rs1,470

Q1FY26 Result Update

Improving execution but challenges continue

Quick Pointers:

• Margin improvement continue despite miss in revenue
• Deal wins remain steady at USD 809 mn vs USD 798 mn in Q4

The revenue growth (-1.4% CC QoQ) was below our estimates (-1.0% CC QoQ), while margins were fairly in line with our expectations. Despite the sequential de-growth, the constructive recovery is visible in Communication and Retail, while BFSI continued its momentum in Q1. Communication (~34% of revenue) remains in a bright spot with a steady recovery in Telco despite the negative seasonality in Comviva. Automotive within Manufacturing remains a challenge, although it reported sequential improvement in Q1. The structural weakness within Automotive will continue to persistent for the rest of the year. Considering the Q1 weakness, the ask-rate for the rest of the year to achieve flat FY26 CC growth is ~0.8% CQGR, which we believe is a little challenging, given the underlying macro uncertainties. Although Communication has improved, it is difficult to draw a trend, given the conversion on deal TCV also tends to be slower than anticipated. However, we believe the cost optimization efforts would continue at a similar pace of FY25 with continued efforts to rationalize employee pyramid and leveraging project Fortius. We are baking in revenue growth of -1.2%/+3.4% CC YoY with margin improvement of 170bps/280bps YoY in FY26E/FY27E. We assign 20x to its FY27E EPS, which translates to a TP of INR1,470. The stock is currently trading at 22x, leaving no potential upside. Retain, REDUCE.

Revenue: TechM in Q1 reported revenue of USD 1.56 bn, down 1.4% QoQ in CC & up 1% QoQ in reported terms below our and consensus est. of 1% QoQ CC decline & consensus estimate of 0.8% QoQ decline. In rupee terms revenue came at INR 134 bn, down 0.2% QoQ. Segment wise in reported terms, Manufacturing, Comms & TME grew by 4%, 2.8% & 1.3% QoQ respectively, while BFSI and Retail declined by 0.6% QoQ and 1.0% QoQ respectively.

Operating Margin: The company continued its margin improvement trajectory with another quarter of sequential growth. EBIT margin improved by 60 bps QoQ to 11.1%, compared to our and consensus estimates of 10.9% and 11%, respectively. This outperformance was driven by a 3.2% QoQ reduction in subcontracting expenses and a 7.1% QoQ decline in SG&A expenses.

Deal Wins: Deal wins remains steady for the company with net new wins of USD 809 mn, up 1.4% & 51.5% YoY with large components made up by deals of USD 25 mn+. On LTM basis NN wins increased by 43.8% during the quarter compared to Q1 of last year.

Valuations and outlook: We expect TechM to report USD Revenue & Earnings CAGR of 1.8% & 23.8% over FY25-27E. The stock is currently trading at 22x FY27E, we are assigning P/E of 20x to FY27E with a target price of INR 1,470. We maintain our “REDUCE” rating.

L&T Technology Services (LTTS IN)

Rating: HOLD | CMP: Rs4,347 | TP: Rs4,250

Q1FY26 Result Update

Strong deal wins lay foundation for better H2

Quick Pointers:

• Q1 revenue impacted by SWC seasonality & automotive weakness
• Large deals signing remain strong with TCV of USD 200 mn+

The revenue growth (-4.2% QoQ CC) was below our estimates (-2.5% QoQ CC), attributed to the SWC seasonality, however ex-India USD revenue grew by 1.5% QoQ. The mobility business (ex-Auto) has stabilized and picked up pace in the off-highway and trucks segments, while Automotive sees incremental pauses and deferrals on executions. The weakness in the Automotive is fairly balanced against the momentum within Sustainability, validated through securing $50m deal within the space. The deal ramp up would support the growth in H2, and even beyond the sizable win ($200m+ LD TCV) the deal pipeline seems to be robust. Given the revenue miss in Q1, the ask-rare translates to ~2.8% CQGR for the rest of the year to achieve low double-digit CC growth. We believe the large deal ramp up and positive SWC seasonality would support growth in H2 to achieve directional milestone. Margins were largely stable despite the notable revenue decline, partly aided by low-margin SWC seasonality and continued momentum in high-margin Sustainability business. We are adjusting our revenue growth against Q1 miss, while keeping our margin estimates largely unchanged. We are building in 9.8%/9.2% CC revenue growth, while keeping EBIT margins unchanged at 13.9%/14.7% for FY26E/FY27E. We are assigning 29x PE to FY27E EPS, translating a TP of 4,250. Valuations capped with no potential upside, maintain our HOLD rating.

Revenue: LTTS revenues in Q1 missed our & consensus estimates largely due to SWC seasonality which was mitigated by Intelliswift integration. LTTS reported revenue of USD 335 mn, down 4.2% QoQ in CC & 2.8% QoQ in USD compared to our estimate of 2.5% QoQ CC decline and consensus estimates of flat revenue growth in USD. The decline was largely due to Tech segment which declined by 8.6% QoQ & Mobility segment which declined by 1.5% QoQ largely due to auto subsegment weakness.

Operating Margin: LTTS reported EBIT margin of 13.3%, a marginal improvement of 10 bps QoQ compared to our estimates of 30 bps QoQ decline & consensus estimate of 30 bps QoQ improvement. The margin improvement was due to higher contribution of margin accretive sustainability business.

Deal Wins: Deal wins were strong in the quarter with large deal TCV of USD 200 mn for the 3rd consecutive quarter despite cautious approach by clients. LTTS during the quarter won several deals including one deal of USD 50 mn, 3 deals of USD 20-30mn & 6 deals of USD 10 mn+ TCV.

Valuations and outlook: We estimate USD revenue/earnings CAGR of 9.8%/10.3% over FY25-FY27E. The stock is currently trading at a PE of 30x FY27E earnings, we are assigning P/E of 29x to FY27E with a target price of INR 4,250. We maintain our “HOLD” rating.