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Maintain ADD on Mindtree - Improved operating profile - HDFC Securities

Posted On: 2020-10-16 00:28:41

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain ADD on Mindtree, supported by strong and sustainable operational performance/outlook. Growth divergence between T1 account and the residual business upended in 2Q, with a flattish T1 performance on strong 1Q seasonality. Mindtree's 'strategy refresh' and service-line reset to focus on client mining (cross-sell), drive multi-year annuity, and partnerships will support broad-based growth ahead. Although deal wins were soft in 2Q with TCV at USD 303mn, they are higher by 10% YoY in 1HFY21. Growth is expected to be led by Retail, CPG & Manufacturing vertical (Husqvarna & S/4 HANA deals) and CMT vertical, and a protracted recovery profile for Travel & Hospitality vertical. The operational turnaround of the company, following the roll-out of the efficiency program, will continue to support margins. Margin expansion of 380bps over the past two quarters was aided by a +290bps impact from lower travel cost and +100bps from lower sub-contracting. Skewed growth profile remains a risk. Our target price of Rs 1,450 is based on 20x Sep-22E EPS, limiting the upside.

2QFY21 highlights: (1) Revenue came at USD 261mn, +2.1% QoQ CC (+3.1% QoQ in USD terms) with T1 flat (-1% QoQ following +10.4% QoQ in 1Q) and strong growth in ex-T1 business (+4.9% QoQ following -15.5% QoQ in 1Q). (2) EBITDA margin improved by +140bps QoQ to 19.7% supported by operational efficiencies; wage hike to be rolled-out in 4QFY21. (3) BFSI growth is driven by cloud and tech modernisation within the Insurance segment.

Outlook: Continued pursuit of high annuity/tail rationalisation/client mining across verticals will support growth ahead. We have factored in USD revenue growth of -2.8/+11.8/+10.6% and EBITDA% at 18.9/18.9/18.8% for FY21/22/23E respectively. EPS CAGR of 24% over FY20-23E (14% over FY21-23E), >35% RoIC, >5% FCF yield support valuations (20.5/18.4x FY22/23E).

Shares of MINDTREE LTD. was last trading in BSE at Rs.1427.55 as compared to the previous close of Rs. 1553.5. The total number of shares traded during the day was 220801 in over 16197 trades.

The stock hit an intraday high of Rs. 1584 and intraday low of 1404.3. The net turnover during the day was Rs. 327642397.

Source: Equity Bulls

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