Tech Mahindra shares jump 7.5%, up 22% in 5 sessions: Growth is returning, but can earnings sustain the momentum?

Tech Mahindra shares traded with impressive gains in early trade on Friday, October 16, following the company's strong Q2 results. The stock rallied as much as 7.49% to ₹1,773.70 on the NSE. With Friday's gains, the stock has jumped over 22% over the past five trading sessions.

Besides an encouraging set of numbers, another highlight of the earnings was the bonus issue. The company's board has recommended a 1:1 bonus issue, under which shareholders will get one bonus share for every share held, as the company marks its 40th anniversary.

The bonus shares are expected to be credited by December 15, according to a regulatory filing.

IT stocks have remained investor favourites this week, supported by the September-quarter earnings of major IT services companies, including TCS, HCLTech, Tata Elxsi, Tata Technologies, Tech Mahindra and Wipro.

The results have been relatively resilient, deal wins have remained strong, and management commentary has reflected confidence in business growth despite persistent global headwinds. These factors have helped sustain positive sentiment towards the sector.

Meanwhile, a global sell-off in AI-linked stocks has added to the divergence between Indian IT services companies and their technology peers overseas.

Broadcom CEO Hock Tan warned that access to capital could become the biggest constraint on AI growth and likened some AI investments to casino gambling, fuelling concerns over the sustainability of the sector's massive spending spree.

Rising funding costs and questions over returns on AI investments have further weighed on US and Asian chipmakers and AI-linked stocks.

Against this backdrop, investors appear to be rotating towards Indian IT services companies, supported by relatively resilient Q2 earnings and strong deal wins. This trend is being described as an “anti-AI trade”.

Here is what leading analysts make of Tech Mahindra’s Q2 numbers

Analysts have offered mixed views on Tech Mahindra following its better-than-expected Q2 FY27 results. While they acknowledged the revenue and margin beat, strong deal wins, and improving growth outlook, they highlighted the need for sustained performance amid challenging industry conditions and relatively rich valuations.

CITI

Tech Mahindra's Q2 results were ahead of expectations, with constant-currency (CC) revenue growth of 2.4% quarter-on-quarter against CITI’s estimate of 1.7%. Around 50 basis points of growth came from the timing of normalisation of a European manufacturing contract. The EBIT margin stood at 14.8%, compared with Citi's estimate of 14.5%.

Forward indicators remained mixed. IT headcount declined 2.4% year-on-year, against a 2.6% increase a year earlier, partly reflecting a large rebadging deal. Trailing 12-month quarterly deal total contract value (TCV) remained in the $1 billion-$1.1 billion range for the fourth consecutive quarter. Management expressed confidence in sustaining momentum.

However, CITI noted that Tech Mahindra trades at a 10-35% premium to peers and said its improved performance needs to be sustained amid challenging industry conditions.

CLSA

Tech Mahindra reported a beat across revenue, EBIT and profit after tax (PAT) of 0.2%, 2% and 3%, respectively, compared with CLSA's estimates. Its order book continued to grow strongly, rising 25% year-on-year despite the absence of mega deal wins during the quarter.

Management reiterated its target of achieving a 15% EBIT margin in FY27 and revenue growth of more than twice the industry growth rate. The company intends to focus on market-share gains without sacrificing margins. Tech Mahindra also indicated that pricing compression in IT services was driven more by intense competition than by pressure on IT services budgets due to AI.

HSBC

HSBC said the Q2 results were slightly better than expected, with Tech Mahindra maintaining its position among the fastest-growing companies in the top-eight peer group. With the 15% EBIT margin target achieved, HSBC expects the company to prioritise and sustain revenue growth of 6-8%. The investment firm believes Tech Mahindra offers a strong growth pick-up at a reasonable valuation.

Nomura

Nomura described Tech Mahindra's Q2 FY27 performance as a modest beat. With the company's three-year goals largely achieved, the focus is shifting towards its longer-term objectives. The stock is currently trading at 18.1 times Nomura's FY28 estimated earnings per share (EPS) of ₹91.2.

Jefferies

Jefferies highlighted an improving growth outlook for Tech Mahindra, with margin expansion continuing as expected.

However, a greater focus on growth could limit further margin expansion beyond FY27.

The investment firm raised its FY27-FY29 EPS estimates by 4-6% and expects the company to deliver constant-currency revenue and EPS compound annual growth rates (CAGRs) of 6% and 12%, respectively, over FY27-FY29.