Automation Adoption And Rising Costs Will Erode IT Services

Key Takeaways

• Slow adaptation to automation, AI, and cloud technologies leaves Tech Mahindra vulnerable to revenue decline and loss of high-margin business to competitors.
  
• Geopolitical headwinds, compliance costs, talent shortages, and increased client insourcing are driving up expenses and eroding profitability and pricing power.
  
• Growing diversification, operational efficiency, and investment in next-generation technologies are strengthening margins, expanding the revenue base, and improving long-term resilience and growth prospects.

Catalysts

Provides information technology services and solutions in the Americas, Europe, India, and internationally.

• The prolonged adoption of automation and AI by enterprise clients is increasingly reducing demand for traditional IT services and support, which constitutes a substantial part of Tech Mahindra's business. This structural decline threatens both revenue growth and the sustainability of margins as clients shift budgets to new technologies that require fewer external resources.
  
• Intensifying geopolitical and protectionist trends are expected to continue, making cross-border workforce mobility and client delivery more complex and costly. Stricter visa regimes and data localization regulations are likely to raise the company's wage bill and compliance costs, which will compress net margins over the medium term.
  
• Tech Mahindra's chronic underperformance in critical digital transformation and cloud domains versus larger competitors persists, with limited evidence of significant market share capture. This trajectory places the company at persistent risk of ceding higher-value, high-margin segments to better-positioned global peers, resulting in sluggish top-line growth and ongoing volatility in earnings.
  
• The company continues to face significant pressure from the commoditization of IT services and rising client insourcing, shrinking the available project pool and exerting strong downward pricing pressure. This dynamic undermines Tech Mahindra's ability to secure premium contracts, eroding both revenue quality and profitability over time.
  
• Ongoing talent shortages and consistent wage inflation in India and other key delivery geographies will further erode operating leverage. As costs climb and client budgets remain constrained by increased automation, Tech Mahindra's profitability outlook is set to deteriorate, making margin expansion targets increasingly unrealistic.

Tech Mahindra Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tech Mahindra compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tech Mahindra's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 10.8% in 3 years time.
• The bearish analysts expect earnings to reach ₹65.0 billion (and earnings per share of ₹73.3) by about July 2028, up from ₹45.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 30.1x today. This future PE is lower than the current PE for the IN IT industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.41%, as per the Simply Wall St company report.

Tech Mahindra Future Earnings Per Share Growth

Risks

• Tech Mahindra has shown seven consecutive quarters of margin expansion, underpinned by rigorous cost optimization, operational efficiency, integration of acquired entities, and focused investments in automation and offshoring, all of which suggest a strengthening of EBITDA margins and potential long-term net margin enhancement.
  
• The company's deal momentum is robust, with large deal total contract value for the quarter up 44% year-on-year, and these wins span multiple verticals (communications, high-tech, BFSI, retail), indicating a diversified and expanding revenue base that could lead to significant revenue growth in the upcoming quarters as these deals convert to sales.
  
• Strategic focus on growth in non-telecom verticals like BFSI (which reported 4.7% year-on-year growth), retail, and expansion in Europe (which grew 11.7% year-on-year) reduces dependency on legacy telecom and U.S. weakness, creating a more resilient, diversified revenue stream that could stabilize and grow earnings over the long term.
  
• Accelerated investments in next-generation capabilities such as AI (with over 200 enterprise AI agents developed), cloud, network automation, and expansion of differentiated offerings like Comviva and managed security services position the company to capture secular digital transformation trends, increasing its addressable market and potential for margin-accretive, higher value work.
  
• Consistent improvements in leadership, talent development, and strategic account management-evidenced by addition of key executive hires, a centralized delivery structure, and successful acquisition of must-have Fortune 500 and Global 2000 accounts-enhance client relationships and organizational capability, supporting long-term revenue acceleration and improved financial profile.

Valuation

• The assumed bearish price target for Tech Mahindra is ₹1182.83, which represents two standard deviations below the consensus price target of ₹1631.14. This valuation is based on what can be assumed as the expectations of Tech Mahindra's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2020.0, and the most bearish reporting a price target of just ₹1110.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹602.3 billion, earnings will come to ₹65.0 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 15.4%.
• Given the current share price of ₹1546.6, the bearish analyst price target of ₹1182.83 is 30.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.