Tech Mahindra's Q4: Strong Deals Fuel Growth

Tech Mahindra delivered robust profit growth in Q4FY26, with net profit climbing 16% year-on-year to ₹1,354 crore. Revenue saw a sequential increase of 4.7%, and EBIT grew by 10.2% quarter-on-quarter to ₹2,084 crore. For the full fiscal year, revenue reached ₹56,815 crore, up 7.2%, with EBIT surging 39.2% to ₹7,152 crore and margins expanding by 290 basis points to 12.6%. The company boosted its outlook with record deal wins totaling $3,794 million for FY26, a 41.6% year-on-year increase. This performance prompted Motilal Oswal to initiate a 'Buy' rating with a ₹1,750 target, forecasting a 20% upside. The brokerage highlighted improved visibility from strong deal closures, particularly a large European deal in the communications vertical. Management expects to reach a 15% EBIT margin target by FY27, driven by operational efficiencies and pricing. However, a headcount reduction of over 1,100 employees year-on-year suggests underlying cost optimization measures.

L&T Technology Services: Focus on Margin Recovery Post-Divestment

L&T Technology Services (LTTS) reported a more mixed financial picture. Q4 revenue declined 1.1% sequentially in constant currency due to portfolio exits and a divestment, though full-year FY26 growth was 7.7%. Despite this revenue headwind, EBIT margins improved sequentially by 40 basis points to 15.2% in Q4, with FY26 margins at 14.5%. Management expects a stable base from Q1FY27 and projects medium-term EBIT margins between 16% and 17%. Motilal Oswal maintained a 'Neutral' stance with a ₹3,400 target, citing portfolio rationalization and emphasizing that deal conversion remains a key factor to watch. Other brokerages hold similar views: ICICI Securities maintains a 'Hold' and cut earnings estimates due to weaker growth in hi-tech verticals. JPMorgan and Nomura retain 'Neutral' ratings, seeing a 'clean slate' for FY27 post-restructuring and expecting growth to return. Nomura noted aspirations for a 13-15% revenue CAGR and mid-16% EBIT margins.

Sector Valuations and Broader Headwinds

In terms of valuation, Tech Mahindra currently trades at a Price-to-Earnings (P/E) ratio of around 27.5-28.6x (TTM). L&T Technology Services trades at a P/E of around 29.3-29.9x (TTM). Both companies trade above the Indian Professional Services industry average P/E of 21.9x and above their respective historical medians, with LTTS considered expensive relative to peers and its fair value by some metrics. The broader Indian IT sector faces pressure following HCLTech's weak Q4 performance and subdued FY27 outlook, which erased an estimated ₹92,000 crore from the Nifty IT index's market capitalization. This has raised concerns about deal ramp-up timelines and pricing pressures. Despite this, India's overall IT spending is projected to reach $176.3 billion in 2026, fueled by AI infrastructure, cloud adoption, and digital transformation initiatives, with the IT services segment expected to grow 11.1%. Tech Mahindra's strong TCV growth aligns with the sector's AI focus, as it launched an education-focused LLM and is accelerating its transition to an AI-led organization. LTTS is also investing in AI-powered platforms, filing numerous patents in AI and GenAI. However, sector-wide challenges like execution risks and demand uncertainty remain significant.

Analyst Concerns and Risks

For Tech Mahindra, Jefferies maintains an 'Underperform' rating, raising its target to ₹1,225. While acknowledging strong deal wins and an improving outlook for the communications vertical, Jefferies noted Tech Mahindra's 16% premium to Infosys, despite similar growth, limits upside. Forex losses notably impacted Q4 profit. The year-on-year headcount reduction of over 1,100 employees suggests a focus on cost control. While this boosts immediate profitability, it could pose long-term risks if it impacts delivery capacity or employee morale. The company's P/E ratio is 61% above its 10-year median, suggesting potential overvaluation.

LTTS faces the risk that its restructuring strategy, while necessary, may impact near-term performance. ICICI Securities cut FY27-28 EPS estimates by 5-6% due to expected weaker growth in the hi-tech sector amid a strategic pivot and leadership changes. While deal wins have been healthy, actual conversion remains a key factor to watch. LTTS's stock has underperformed significantly over the last six months (-18%) and one year (-22%). Despite minimal debt and a net cash position, the company's ability to translate deal wins into revenue growth and sustained margin expansion will be critical.

Future Outlook

Looking ahead, Tech Mahindra's management is confident in outperforming peer-average growth by FY27 and progressing towards a 15% EBIT margin. This is supported by broad-based growth, strong deal intake, and sustained investments in AI and high-growth service lines. Motilal Oswal estimates FY27 EBIT margins at 14.8%, projecting a 25% CAGR in INR PAT over FY26-28. For LTTS, management projects a revenue CAGR of 13-15% over the next five years, with EBIT margins around the mid-16% level, though this may involve tuck-in acquisitions that could dilute margins. Analyst sentiment for LTTS remains largely neutral, with a strong emphasis on demonstrated execution. The key investor watchpoints for both companies remain deal conversion, margin sustainability, and the broader recovery in global technology spending.