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Maintain ADD on Mindtree - Decade-high growth! - HDFC Securities

Posted On: 2021-10-14 22:37:55 (Time Zone: IST)


Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr Vinesh Vala, Institutional Research Analyst, HDFC Securities

Mindtree (MTCL) delivered an exceptional quarter with double-digit QoQ growth and beat on margins despite wage hikes and supply side issues. The dependence on the top account is coming down and growth was broad-based across verticals/geographies/service lines. Mindtree's growth momentum will continue, supported by non-T1 accounts (+17.6% QoQ), customer success (+21.8% QoQ) and investments in Europe (manufacturing). Its sustainable structural improvement is validated by (1) the uptick in Q2 deal TCV at >USD 300mn and lower dependence on non-T1 account, (2) improved cross-sell and addition of strategic logos (seven in Q2), and (3) healthy growth in the travel vertical, supported by core modernisation. The company remains confident of delivering an EBITDA margin of >20% despite the ongoing supply side challenges, supported by better margins in new deals, increasing offshoring, and better utilisation. To address the rising attrition (+400bps) the company will continue to hire freshers, focus on reskilling existing employees, and rely on sub-contracting for niche talent. We increase revenue/EPS estimates by 6/10% for FY23/24E to factor in higher growth. Our target price of INR 4,400 is based on 35x Dec-23E EPS (23% CAGR over FY21-24E on a high base in FY21 of >70%). Maintain ADD.

Q2FY22 highlights: (1) MTCL reported decade-high revenue at USD 350mn (above our estimate of USD 337mn), +12.8% QoQ in USD terms, supported by continued strong growth in non-T1 business at +17.6% QoQ while T1 growth remained flat QoQ. (2) EBITDA margin improved by 25bps QoQ to 20.5%, helped by operational efficiencies (+190bps QoQ), which offset the negative impact of wage hike (-140bps QoQ) and FX headwind (-25bps). (3) Growth was broad-based across verticals, led by retail, CPG and manufacturing (+29.7% QoQ); travel (+14.2% QoQ); BFSI (+8.9% QoQ) and comms, media & tech (+5.4% QoQ). (4) Deal TCV was at USD 360mn, 19% YoY (book to bill at 1.03x compared to 1.16x in Q2FY21). (5) The company had a net headcount addition of 2,476 in Q2.

Outlook: We have factored in USD revenue growth of +31.1/+19/+14.5% and EBITDA at 20.3/20.7/21.4% for FY22/23/24E respectively. We expect an EPS CAGR of 23% over FY21-24E and RoIC of >40% to support the valuation (40x FY23E).

Shares of MindTree Limited was last trading in BSE at Rs. 4693.20 as compared to the previous close of Rs. 4363.25. The total number of shares traded during the day was 238753 in over 23940 trades.

The stock hit an intraday high of Rs. 4937.15 and intraday low of 4550.00. The net turnover during the day was Rs. 1133585353.00.


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