TechM reported steady revenue growth & strong margin expansion in Q2FY25. Revenue came at US$1.59 bn, up 0.7% QoQ in CC vs our expectation of flat growth & cons. est. of 0.4% QoQ CC growth. Growth in qtr. was aided by verticals of Hitech, CME & BFSI offset by the weakness in Manufacturing. EBIT margin improved by 110 bps QoQ to 9.6% vs our est. & cons. est. of 60 bps & 70 bps improvement respectively due to currency tailwinds & savings from Project Fortius. New deal win was steady at US$ 603 mn vs deal win of US$ 534 mn in Q1. PAT came INR 12.6 bn vs our est. of INR 10.1 bn due to higher other income.

The recovery in Communication business (+2.8% QoQ, 33% of rev) was notable after having delivered weak performance over the last several quarters. Although the growth within Communications was dominated around Europe and APAC regions, while US Telco OEMs haven’t seen meaningful uptick in capex owing to elevated interest rate. Enterprise business growth was diluted on account of Manufacturing (Automotive), otherwise the performance of other verticals was healthy. The management is focused on driving growth within few sub-verticals of BFSI despite having cognizant of crowded space and stiff competition. It believes the certain set of offerings are unique and would be doubling-down to land & expand the top accounts. At the same time, the management is prudent enough to stay selective (on client profile) and chase behind quality large deals to justify on margin threshold. The investments in top strategic accounts through senior hiring and mining the existing accounts are in progress, which is evident through elevated deal TCV, confident of keeping a TCV band of $600-800m. The progress on cost rationalization was yet again remarkable despite having growth challenges.

We believe, the constructive recovery in growth and margin profile is a function of strategic initiatives laid out by the company coupled with improving economic indicators. However, as we transition through growth-led initiatives, the company might face stiff competition to win strategic large deals having high-cost component attached at the front-end owing to margin targets. We are passing on Q2 growth and margin beat and baking in 1.0%/5.1%/8.2% CC in FY25E/FY26E/FY27E. With continued progress in margin execution (led by Project Fortius), we are revising our margin upward by 40 bps in FY25E, while keeping FY26/FY27E broadly unchanged.

Valuations and outlook: We believe the company’s laid out strategy to drive balanced portfolio mix with reduced dependency on communications is a positive. Although the company has integrated portfolio business into its core operations, the growth engines are yet to get fueled. The stock has witnessed strong run-up over the last few sessions, we believe all positives are factored into the CMP. The stock is currently trading at 21x FY27E, we are assigning P/E of 22x to FY27E with a target price of INR 1,790. We maintain “ACCUMULATE” rating.