Tech Mahindra — the margins came back; now for the harder half

The Pulse

Tech Mahindra is two years into a turnaround that has, so far, delivered exactly half of what it promised — the better-looking half. When Mohit Joshi arrived from Infosys as CEO in December 2023, he inherited a company whose profitability had quietly collapsed: operating margins had fallen to around 6–9%, profit had roughly halved, and a string of past acquisitions sat undigested on the books. Since then, margins have climbed for ten consecutive quarters, from a ~6.4% trough to 13.8% by the March 2026 quarter, lifting full-year FY26 operating margin to 12.6% — a genuinely impressive, methodical rebuild via a cost program called Project Fortius. The catch is that revenue went almost nowhere while this happened; the company shrank or stagnated in dollar terms for three years. The good news arriving late in FY26 is that growth is finally turning — the December quarter was the fastest in three years — and the order book is at a record, headlined by a >$500 million European telecom deal, the biggest communications win in the company’s history. So the story today is clean on margins and credibility, and early-and-unproven on growth, with management asking to be judged in FY27 on a 15% margin target, growth above the industry average, and returns climbing toward 30%.

The Business — a telecom-rooted IT house with a margin problem it’s fixing

Tech Mahindra sells the same thing every large Indian IT firm sells: people and software, billed by the project or the hour, to large enterprises modernising their technology. It is asset-light, nearly debt-free (a few thousand crore of borrowings against ~₹29,000 crore of reserves), throws off cash freely, and pays most of it out — a 3.45% dividend yield on a near-100% payout ratio, which is distinctly more generous than its larger peers. The Mahindra Group holds ~35%, and the company is professionally run rather than founder-driven.

What sets it apart — for better and worse — is telecom. Communications is its single largest vertical and its deepest moat: the business traces to a 1986 joint venture with British Telecom, and decades of network and 5G engineering have made it one of the few global IT firms with genuine full-stack telecom depth. That heritage (reinforced by the 2009 rescue-acquisition of Satyam, after which clients largely stayed put) is the source of 10-to-20-year client relationships management leans on. But telecom is also a finicky, capex-cyclical industry, and over-indexing to it is part of why Tech Mahindra’s results swing more than TCS’s or Infosys’s. The structural tell is in the margins: where the majors run at ~25%, Tech Mahindra has historically lived in a 9–18% band. That gap is the whole investment debate — it’s both the company’s disadvantage and, if Fortius closes it, its biggest source of upside. The other complicating feature is a pile of past acquisitions (“portfolio companies”) that dragged margins and are now being integrated onto shared systems — a clean-up cost today, a claimed differentiator in payments and banking tomorrow.

How Management Thinks — rigour, candour, and a deliberate allergy to hype

Joshi has imported an Infosys-style operating discipline, and the most striking thing across these four calls is how candid management is about what isn’t working. Joshi flatly told analysts that the original turnaround plan’s assumption — that FY26 would return to near-industry growth — “has not been met.” That kind of plain admission, repeated rather than buried, is the consistent texture of these calls. The CFO at one point described the goal as making the company “boring” and “predictable” by design. After years of lumpy, surprise-prone results, that is the pitch.

Project Fortius is the engine room: a roughly $250-million-a-year cost program pulling four levers — value-based pricing, productivity on fixed-price contracts, rotating the workforce pyramid toward juniors and offshore, and integrating the acquired companies. Management has been refreshingly clear that the easy wins (overhead, support-function consolidation) are largely banked, and the next leg of margin must come from the harder lever — closing the ~8-percentage-point productivity gap between time-and-materials and fixed-price work. Notably, headcount has been falling while revenue and profit rise, as AI and better bench management free up people — a flywheel they describe candidly rather than dressing up.

On AI generally, management’s honesty is a differentiator in itself: they have refused to publish a headline “AI revenue” number, calling the figures peers tout not “credible and auditable,” and instead point to productivity (a claimed ~7%) and to research credentials like a sovereign LLM built under India’s AI mission. Capital allocation has been disciplined — organic-only through the rebuild, returning ≥85% of free cash flow, with large deals taken only where they’re margin-accretive (“not wanting to win revenue at any price”). The credibility scorecard is lopsided in an honest way: on margins they have promised and delivered, quarter after quarter; on growth they have repeatedly missed and said so, which is its own kind of trust-building. The one thing to watch is that the next phase asks them to deliver on the half they’ve been weakest at.

Where It’s Going — margins toward 15%, growth underwritten by telecom

For FY27 the commitments are explicit and worth holding management to: a 15% EBIT margin, constant-currency organic growth above the peer-group average (a deliberately relative target the CFO calls the “margin of safety”), and return on capital climbing toward 30%. The margin path looks achievable — the productivity and pricing levers are identified, AI is additive, and the trajectory has been relentlessly upward. The growth path is the real question. The order book is genuinely strong (record FY26 deal wins of ~$3.8 billion, up 42%), and the marquee European telecom mega-deal plus a second large telco win essentially underwrite FY27 growth — but that is also the vulnerability. Management was candid that these two deals carry the year, that they ramp only from the first half of FY27, and — tellingly — that organic diversification “won’t move the needle” on the company’s portfolio mix without acquisitions. Hence the signalled pivot back toward selective tuck-in M&A now that the house is in order.

The honest tensions are visible: growth is still soft and uneven beneath the headline deals (banking has been volatile, hi-tech and semiconductors weak, auto in wait-and-watch), the recovery leans heavily on the same telecom vertical that makes results swing, and AI is simultaneously a productivity tailwind and a long-run threat to the people-billing model that all Indian IT rests on. But the shape is coherent: a credible operator has fixed the profitability half of a broken company in two years, flat out, and is now turning to the harder, less certain task of making it grow again — with a record pipeline and unusual candour on his side, and a telecom-concentrated, AI-uncertain demand environment working against him.

The Four Checks

1. Quality and moat. A decent business with a real but narrow edge. The moat is relationship depth in one vertical: four decades of telecom engineering since the British Telecom joint venture, full-stack network and 5G capability few global IT firms match, and 10-to-20-year client relationships (a telco book spanning 100+ operators across IT, BPS, network services, and Comviva products). Outside telecom, though, Tech Mahindra is a mid-tier vendor in a brutally contested industry — management itself concedes it is “literally the smallest player” in some verticals — and the structural tell is the margin: a 9–18% band where TCS and Infosys live near 25%. Switching costs are real but the same forces that protect its accounts protect everyone else’s, and AI is a live question mark over the entire people-billing model. Call it a genuine niche advantage inside a commodity-adjacent industry, not a fortress.

2. Returns on incremental capital and runway. The engine barely needs capital — fixed assets are ~₹14,900 crore on ₹49,400 crore of total assets, free cash flow ran ₹5,626 crore against ₹4,806 crore of profit in FY26 — so the question is what capital-free growth earns, and whether there is any. Returns have rebuilt sharply: ROCE bottomed at 12% in FY24 and was back to 23% by the June 2026 snapshot (management cites ~26% and targets 30% in FY27), while ROE sits at 17.6% with the 3-year average still scarred at 13.7%. The trend is clearly up. The runway is the weak half: revenue went essentially nowhere for three years (5-year sales growth of 8.46%, constant-currency FY26 growth of just 0.6%), and FY27 growth is underwritten by two telecom mega-deals rather than broad demand. Good and improving returns, an unproven runway.

3. Capital allocation for the stage. Largely textbook for where the business is. With growth consuming almost no capital, management returns nearly everything — payouts of 150% in the FY24 down year, 94% in FY25 and FY26 (104% of PAT, 91% of FCF, on the “highest ever” ₹51/share dividend), against a stated ≥85%-of-FCF policy. During the rebuild they went deliberately organic-only, integrated the inherited “portfolio company” acquisitions that had dragged margins, and walked away from dilutive large deals — every mega-deal signed is margin-accretive as sold, tracked at board level. The quibbles: the return mechanism is dividends rather than buybacks (no buyback visible in this period, despite the stock spending FY26 well off its highs), and the legacy acquisition mess this team is cleaning up is a reminder of what the same balance sheet did under prior management. The just-signalled pivot back to tuck-in M&A is the thing to watch, not yet a thing to mark down.

4. Price. Full but defensible. As of the June 2026 snapshot, the stock trades at ₹1,485 — 29.1 times earnings, with a 3.41% dividend yield on a ~94% payout, against ROCE of 23% and EPS of ₹49 that has only just clawed back to where it stood in FY23 (and remains below FY22’s ₹57). Twenty-nine times is a steady-compounder multiple being paid for a turnaround whose margin half is delivered and whose growth half is still a promise; the embedded bet is that the 15% FY27 margin target and the telecom mega-deal ramp both land. If they do, the multiple is reasonable; if growth disappoints again, there is little cheapness to fall back on beyond the yield. Not demanding by IT-sector standards — the price sits in the lower half of its 52-week range — but not cheap either.

Sources

• Concall transcripts read: Q1 FY26 (Jul 2025), Q2 FY26 (Oct 2025, held from London), Q3 FY26 (Jan 2026), and the Q4/FY26 Analyst Day (22 Apr 2026, Pune). CEO Mohit Joshi and CFO Rohit Anand on all calls.
• Annual reports read: FY23 (last full year under prior CEO C.P. Gurnani, and the succession document), FY24 (Joshi’s first, the “transition/reset” year), FY25 (margin-led turnaround on flat revenue) — trimmed high-signal sections.
• Snapshot: screener.in consolidated, fetched 2026-06-09 (logged-out). Current figures cited (P/E ~29, ~3.45% dividend yield, ROCE ~23%, OPM 16% FY26, promoter ~35%) are from this snapshot.
• Gaps flagged: the November-2025 quarter had a presentation only, no transcript, so it was skipped — coverage is the four FY26 quarters plus the year-end Analyst Day. Some annual-report extracts omitted explicit numeric FY27 targets (those were taken from the concalls instead), and a FY24→FY25 segment-cost reclassification slightly complicates year-on-year margin comparisons in the reports.
• Full research dumps: vault/Sources/Earnings/Tech Mahindra Ltd/ (not published).