Mr. Mitul Shah, Head of Research at Reliance Securities
Mindtree - 2QFY23 Result Update - Strong Performance; Fairly Valued... Maintain HOLD
Mindtree's (MTCL) 2QFY23 revenue stood at US$422mn (up 6% QoQ and up 21% YoY), which was 1.5% above our estimate of US$416mn, driven by a strong performance in BFSI, travel, transportation & hospitality verticals. EBIT margin came in at 18.6% (down 59bps QoQ /up 41bps YoY), 37bps above our estimate of 18.2%, driven by operating efficiencies, better pricing environment and currency benefit. Net income stood at Rs5.1bn (up 8% QoQ/ up 28% YoY), while net margin came in at 15% vs. our estimate of 14.4%. Overall TCV stood at US$518mn in 2QFY23 and for 1HFY23 it surpassed US$1bn mark for the first time, which is commendable. The management highlighted a strong demand environment and robust deal pipeline and targets a profitable industry-leading double-digit revenue growth in FY23. The revenue contribution from top clients grew by 30bps QoQ to 26.3%, higher compared to the mid-cap peer group. MTCL's merger with LTI would reduce client concentration risk to greater extent. Moreover, the stock trades at fair valuation of 24x FY24E EPS. Considering strong deal pipeline, 20% margin guidance, reducing client concentration risk and valuation comfort, we maintain HOLD for MTCL with a revised target price of Rs3,460 (vs. the prior Rs2,965), valuing at an unrevised multiple of 25x on FY24E earnings (in line with our target P/E multiple of LTI).
TTH Vertical and NA aided Growth
1) Among verticals, growth was led by Travel, transportation & hospitality vertical (10.2% QoQ) and BFSI (8.8% QoQ) 2) Among geographies, growth was particularly strong in North America (7.5% QoQ), APAC & the Middle East (5% QoQ) and UK & Ireland (3.2% QoQ). 3) LTM attrition was at 24.1% vs. 24.5% in 1QFY23, the management indicated that these high attrition levels have already started moderating and would taper down further in coming quarters. During 2QFY23, the company added a gross work force of 835 employees. 5) Top client's concentration increased by ~30bps QoQ to 26.3%.
Execution Remained Better-than-Expected; Headwinds Persist
The company reported 2QFY23 EBIT margin of 18.6% (down 59bps QoQ /up 41bps YoY). MTCL expects to maintain >20% EBITDA margin in FY23. We believe that supply side issue is sorted out to some extent with moderation in attrition, while still it remains a key challenge. Seasonally 2H is weak with lower working days. Therefore, margins are expected to remain under pressure on lower scale and wage inflation in 3QFY23. We estimate an EBIT margin of 18.2-19.1% over FY23E-FY24E.
Valuation Captures Majority of the Positives; Limited Upside
We expect strong double digit revenue growth for MTCL. Factoring weaker INR, we increase our revenues by 3-4%, while on better operating margins, we increase our EPS estimates by 4% and 17% for FY23E and FY24E respectively. Now we expect the company to report FY22-FY24E revenue CAGR of 15%, against FY18-FY21 CAGR of 8%. Lower client concentration risk post-merger with LTI and recent sharp stock price correction gives us valuation comfort. Therefore, we maintain HOLD on MTCL with a revised target price of Rs3,460, valuing the stock at an unrevised multiple of 25x on FY24E earnings with a limited upside of just 4% from current level.
Shares of MindTree Limited was last trading in BSE at Rs. 3374.45 as compared to the previous close of Rs. 3323.50. The total number of shares traded during the day was 54402 in over 5495 trades.
The stock hit an intraday high of Rs. 3472.30 and intraday low of 3343.80. The net turnover during the day was Rs. 185665201.00.