LIC's Strategic Stake Increase in Tech Mahindra Amid a Downturn: A Sign of Undervaluation and Long-Term Growth Potential

The Life Insurance Corporation of India (LIC) has made a bold move in the Indian IT sector, increasing its stake in Tech Mahindra to 10.84% as of 2025, up from 8.8% in 2023Tech Mahindra Limited: Valuation Ratios, Analysts' Forecasts^[1]. This strategic investment, executed through open market transactions, underscores institutional confidence in the company's long-term growth potential despite a 10% year-to-date decline in its stock priceTech Mahindra Limited: Valuation Ratios, Analysts' Forecasts^[1]. The decision aligns with broader trends in the IT sector, where firms with robust innovation pipelines and cost-optimization strategies are attracting attention amid macroeconomic uncertainties.

Financial Resilience and Strategic Reforms

Tech Mahindra's Q2 2025 financial results highlight its operational resilience. The company reported a net profit of Rs 1,250 crore, a 153% year-on-year increase, driven by asset sales and cost-cutting measuresTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. Revenue grew 3.49% to Rs 13,313 crore, while EBIT margins expanded by 110 basis points to 9.6%Tech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. These figures reflect the effectiveness of initiatives like Project Fortius, which focuses on AI-first and cloud-first capabilities, and the company's ability to secure large contracts, such as a $603 million Total Contract Value (TCV) winTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2].

The company's strategic investments in AI and automation are particularly noteworthy. As stated by Tech Mahindra's management, these efforts are designed to future-proof operations and capitalize on the global shift toward digital transformationEV/EBITDA Multiple by Sector/Industry 2025 | Siblis Research^[4]. This aligns with broader industry trends, where IT firms with strong AI and cloud capabilities are outperforming peers in deal acquisition and margin stabilityTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2].

Valuation Metrics: A Case for Undervaluation

Tech Mahindra's valuation metrics suggest it is trading at a discount relative to its peers. As of September 2025, the company has a trailing P/E ratio of 29.6x and a forward P/E of 23.6xTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. While this is higher than Tata Consultancy Services' (TCS) 20.2x and Infosys' 23.9x, it is significantly lower than Wipro's 47xTech Mahindra Limited: Valuation Ratios, Analysts' Forecasts^[1]. Similarly, its EV/EBITDA ratio of 18.14x sits between TCS (17.2x) and Infosys (15.6x), while its P/B ratio of 4.84x is in line with industry averagesTech Mahindra Limited: Valuation Ratios, Analysts' Forecasts^[1].

These metrics indicate that Tech Mahindra is valued more conservatively than its peers, despite outperforming them in profitability and margin expansion. For instance, its 8.51% net profit margin and 11.64% ROICTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2] suggest strong financial efficiency, which is not fully reflected in its stock price. Analysts argue that the company's focus on AI-driven innovation and global client diversification positions it to outperform in the medium termTech Mahindra Limited: Valuation Ratios, Analysts' Forecasts^[1].

Institutional Investor Trends and Sector Dynamics

The IT sector has seen a shift in institutional investor behavior in 2025. Foreign Institutional Investors (FIIs) have reduced exposure due to concerns over a U.S. recession, while Domestic Institutional Investors (DIIs) have stepped in to support domestic equitiesTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. LIC's stake increase in Tech Mahindra aligns with this trend, as DIIs prioritize companies with long-term growth narratives and strong domestic demand.

Moreover, the sector's valuation multiples have remained elevated, with the IT sector's EV/EBITDA at 27.25 in Q3 2025EV/EBITDA Multiple by Sector/Industry 2025 | Siblis Research^[4]. This suggests that while global macro risks persist, investors are willing to pay a premium for firms with scalable, technology-driven business models. Tech Mahindra's strategic alignment with AI and cloud—key drivers of the sector's next phase of growth—makes it an attractive candidate for such capital flows.

Analyst Outlook: Caution and Optimism

Analyst forecasts for Tech Mahindra and its peers are mixed. Jefferies has downgraded the stock to "Underperform," citing AI-driven cost pressures and weak global tech spendingTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. However, other analysts highlight the company's potential to benefit from India's IT hiring rebound, which is projected to add 82,000 fresh graduates in 2025Tech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2]. The sector's focus on AI, ML, and cloud technologies is expected to drive demand for specialized skills, further bolstering Tech Mahindra's competitive edgeTech Mahindra Q2FY25 results: PAT up 153% to Rs 1,250 cr^[2].

Conclusion: A Strategic Bet on Innovation

LIC's stake increase in Tech Mahindra is a clear signal of confidence in the company's ability to navigate macroeconomic headwinds through innovation and operational discipline. While the stock's year-to-date decline reflects broader market jitters, its valuation metrics and strategic initiatives suggest it is undervalued relative to its growth potential. For investors seeking long-term value in the IT sector, Tech Mahindra represents a compelling opportunity—a firm poised to capitalize on the next wave of digital transformation.