Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us  

| More

Mindtree - Margin beat and raise cycle seems to be over! - ICICI Securities

Posted On: 2021-01-19 05:09:54 (Time Zone: Arizona, USA)

Even as consensus called out the margin peak several times, we believed otherwise (refer - 'Can margins surprise further?' and 'Margin has not yet plateaued'. Potential for further margin surprise was the key rationale behind our earlier BUY rating. Besides transient Covid-led tailwinds, Mindtree's margin expansion was aided by sustainable and structural changes in costs. While we expected parity with cost structure of LTI by FY23E, the convergence has happened earlier! As some of the operational metrics (e.g. utilisations, salary costs) recalibrate towards their new normal, margins are more likely to contract (than be stable or increase). Incrementally, as investor focus shifts from mere cost structure correction to growth, we see limited margin of safety for disappointments given the favourable FY21 base. Post our reinitiation of coverage in Oct-20 with a BUY rating, the stock price was up ~25%. As we reach the fag end of company-specific tailwinds and turn cautious on the sector (detailed in our earlier note), we downgrade Mindtree to ADD (from BUY).

- In-line revenues, robust beat on margins; surprisingly lower salary costs: Revenue growth (4.6% QoQ, CC) was slightly ahead of our estimates. Growth was broad-based across all key geographies - US, Continental Europe, UK and Ireland. Barring BFSI, which remained largely stable, growth across verticals too was broad-based. Sequentially, EBIT margins improved ~290bps and were ~220bps ahead of our estimates. This was majorly due to two factors:

Firstly, utilisations (including trainees) witnessed ~430bps QoQ improvement as the company catered to some of the incremental demand through reskilling existing workforce, rather than hiring new talent. Secondly, as is the case with rest of the industry, Mindtree too had seen the benefit of incremental project ramp-ups happening largely offshore due to restricted travel.

Secondly, overall employee benefit expense sequentially remained considerably stable (at Rs12.6bn). However, it is key to note that employee salary costs declined by ~Rs640mn even as EOP headcount increased (by 370). We await further clarity from the management on this aspect.

- Management expects industry-leading growth and >20% EBITDA margins: Total Contract Value (TCV) of deals booked during the quarter was healthy at US$312mn (vs US$303mn in Q2FY21). Management hinted at an aspiration for industry-leading growth. In addition, the company also hinted at >20% EBITDA margins in the near future (vs 23.5% in the Dec-20 quarter). Incremental hiring, consequent recalibration of utilisations (to 81-82% levels from 83.1%, includes trainees) and impending wage hikes are some of the foreseeable margin headwinds. On the other hand, management also hinted at further margin levers that can absorb some of the aforementioned headwinds.

- Fag end of company-specific tailwinds! Downgrade the stock to ADD: While we expected a parity with cost structure of LTI by FY23E, the convergence happened earlier! As some of the operational metrics (e.g. utilizations, salary costs) recalibrate towards their new normal, margins are more likely to contract (than being stable / increase). Incrementally, as investor focus shifts from mere cost structure correction to growth, we see limited margin of safety for disappointments given the favorable FY21 base.

As we rebase our exchange rate assumptions and reset our expected growth / margin trajectory, our EPS estimates over FY21E-FY23E witness 3-6% downward revisions. At our revised estimates, the stock is trading at 23x 1-year forward P/E (~56% above pre-Covid averages). Post we reinitiated coverage in Oct-20 with BUY rating, stock was up ~25%. As we reach the fag end of company specific tailwinds and turn cautious on the sector (detailed in our earlier note), we downgrade the stock to ADD (vs BUY earlier).

Shares of MINDTREE LTD. was last trading in BSE at Rs.1680.3 as compared to the previous close of Rs. 1660.6. The total number of shares traded during the day was 176604 in over 13549 trades.

The stock hit an intraday high of Rs. 1759.7 and intraday low of 1665.15. The net turnover during the day was Rs. 301668740.

Source: Equity Bulls

Click here to send ur comments or to

Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only., its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.

Other Headlines:

Easy Trip Planners Ltd. - IPO - Strong Financials - Reliance Securities

Bharat Forge - Initiating Coverage - Constant evolution - HDFC Securities

Mahindra Logistics - Large-ticket deal win - ICICI Securities

Company Update - Huhtamaki India - ICICI Direct

Gladiator Stocks: IndusInd Bank, VIP Industries - ICICI Direct

Warehousing demand expected to grow around 160% to reach 35 million sq. ft in 2021: JLL

Telecom - Spectrum auction: Prudent investment by Bharti Airtel - ICICI Securities

JB Chemicals & Pharmaceuticals - Analyst meet takeaways - ICICI Securities

IPO Review - MTAR Technologies Ltd - ICICI Direct

Auto Sector - Monthly Volume Round-up - Feb 21 - Decent YoY Growth Continues

Aditya Birla Fashion and Retail - Focus on scaling up new businesses - ICICI Securities

Automobiles (wholesale) - Wholesales push continues despite modest retail trends - ICICI Securities

Aditya Birla Capital - Thoughtful (inclusive) conglomerate business evolution commands premium - ICICI Securities

Jubilant Foodworks - Buying in-the-money options - ICICI Securities

Multi Commodity Exchange of India - Play on rising commodity prices? - ICICI Securities

Gladiator Stocks - Sudarshan Chemical - ICICI Direct

Monthly Commodities Outlook - March 2021 - ICICI Direct

ICICI Direct - Monthly Currency Outlook: Rupee to depreciate further towards 75.00 level...

ICICI Direct - Covid Recovery Pulse - E-way bill generation in February 2021 starts on strong note...

Company Update - Virtual JLR Investor Event - Tata Motors - ICICI Direct

Analyst Meet Update - Aditya Birla Fashion and Retail - ICICI Direct

MTAR Technologies Ltd. - IPO - Huge Opportunities from Clean Energy Bodes Well - Reliance Research

ICICI Direct Derivatives Weekly View (February 26): Failure to move above 14700 may extend declines towards 14300...

Bank: Sector Credit Trends - Slows, Yet again - HDFC Securities

Piramal Enterprises - Pharma day highlights - ICICI Securities

Polymer price tracker - PVC prices rise sharply again! - ICICI Securities

Greenply Industries - Growth returns, at an inflection point - ICICI Securities

Tata Motors - JLR future proofing itself with rapid electric transition - ICICI Securities

Dairy - Higher freight cost and increase in Global SMP prices - ICICI Securities

Analyst Meet Update - Nestlé India (Hold): Focus on product innovation, expanding rural reach - ICICI Direct

MTAR Technologies Ltd - A strong player in booming high precision engineering... - Geojit

Rollover Report for February - March 2021 : Angel Broking

Reaction from industry experts on Q3FY21 GDP numbers

M. Govinda Rao, Chief Economic Adviser, Brickwork ratings on Q3FY21 GDP numbers

Mr. Dhiraj Relli, MD & CEO, HDFC securities views on Q3FY21 GDP Growth Number

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on Q3FY21 GDP

Rollover Analysis - Feb 21, 2021 - YES Securities

Consumer Durables - Demand-driven recovery continues - HDFC Securities

Cement - Demand surprises; earnings upgrade to continue - ICICI Securities

Gladiator Stocks - TeamLease Services - ICICI Direct

Gladiator Stocks - Metals to outshine post multi-year breakout... - ICICI Direct

Company Update - Sundaram Finance - ICICI Direct

Indian pharmaceutical industry to meet an ambition of US$130 billion by 2030 through innovation-led growth: EY-FICCI report

4th Industrial Conclave - Bullish undertone, favourable valuation - HDFC Securities

Sanofi India - Weak quarter; sequential improvement - ICICI Securities

Sunteck Realty - All eyes on upcoming launches - ICICI Securities

Company Update - Tata Motors - ICICI Direct

Q4CY20 Company Update - Mahindra CIE Automotive - ICICI Direct

Event Update - Hindalco - ICICI Direct

EY report launch at BioAsia 2021 - Moving the needle: Healthcare industry in a post-COVID world

Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2020