Friday, October 14, 2022

Mindtree Ltd: Strong Operating Performance During Q2, 2022


CMP: Rs3317  |  Target Price: Rs3350

MTCL reported strong operating performance, with an all-round beat in Q2. Deal intake remains strong in Q2, with TCV of USD518mn and a healthy mix of annuity and transformation deals. Mgmt remains cautiously optimistic and is closely monitoring developments in sectors like hi-tech, retail, logistics and manufacturing which, in the near term, are expected to demonstrate more sensitivity to the prevailing uncertain macro environment. Further to this, Company has emphasized that its European clients are substantially cautious and apprehensive, which is reflected in its slower pace of decision-making and elongated deal-closure cycles. However, MTCL remains confident about sustaining revenue-growth momentum in the medium term on the back of its ability to address digital transformation’s dual objectives of revenue maximization and cost optimization, healthy deal pipeline, stitching new partnerships with strategic partners, and potential synergy benefit with LTI. We raise our EPS by 2.9%-4.7% for FY23E-25E, factoring-in the Q2 beat. We remain positive on the mid-to-long term growth prospects of the MTCL-LTI combined business and benefits from merger synergies; but growth momentum would moderate in the near term due to potential lower spending in Hi-tech and Retail and current valuation leaving limited upside. We maintain HOLD with TP of Rs3,350/sh at 23x Sep-24E EPS (earlier Rs3,250).

Result summary: Revenues grew 5.7% QoQ to USD422.1mn (7.2% CC), above our expectations of USD416.5mn. EBITDAM declined by ~10bps sequentially, on account of salary hikes (-240bps) and largely offset by the absence of visa and merger-related one-off expenses (+110bps), currency movement (+50bps) and operational efficiencies (+70bps). Net profit stood at Rs5.1bn, above our estimates due to better operating performance. Revenue growth was broad-based and led by BFSI (10.2% QoQ in USD), TTH (8.8%), CMT (4.3%) and Healthcare (34.9%, albeit on a smaller base), while Retail declined by 0.8% QoQ (Management indicated it grew 2.9% CC QoQ). The top-client grew 6.9% QoQ, while the top 2-10 clients grew a mere 0.3%. What we liked: Strong revenue growth (7th consecutive quarter of >5% CC QoQ growth); robust deal wins; resilient margin performance. What we did not like: Softness in CMT (ex-top client) and potential growth headwinds in the sector.

Earnings-call KTAs: 1) Management indicated that some annuity & transformation programs ended in H1 and that clients are making a cautious move in new programs which could weigh on growth in H2. 2) Client conversations and deal pipeline indicate an increased focus on cost optimization and efficiency deals. 3) Company highlighted that the pain in RCM on account of ramp-downs is largely behind and that it is hopeful of a recovery, barring unexpected macro headwinds impacting the sector. 4) While legacy-deal pricing continues to be competitive, the company is able to command a premium for its digital and niche skills. 5) Although it has not witnessed any cancelations, the company is seeing potential growth headwinds in hi-tech and increased caution in decision-making in Europe, specifically in the retail, CPG, logistics and manufacturing verticals. 6) Company highlighted that Q3 is a seasonally-weak quarter due to furloughs and lesser working days. Slower pace of decision-making amid macro uncertainties could be an added headwind. 7) Company is awaiting the final regulatory approval for its merger with LTI which it expects to be completed by the end of CY22. 8) Travel expenses are expected to inch up from Q4, but will remain below pre-Covid levels. 8) LTM attrition stood at 24.1% in Q2 and moderated by 40bps sequentially; Mgmt expects it to further ease in coming quarters. 9) Net employee addition was 835 in Q2, lower compared with the past few quarters, as the company is evaluating integrated hiring and talent strategy with LTI. 10) ~1/3rd of its employees are working from office in a staggered manner.

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