Hold Mindtree Ltd For Target Rs.4,550 - Emkay Global
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Strong operating performance
* MTCL’s Q3FY22 revenue grew by a healthy 4.7%/33.7% QoQ/YoY to USD366.4mn in a seasonally soft quarter, and was broadly in line with our expectations. EBITDAM expanded by ~100bps QoQ to 21.5%, ahead of our expectations on the back of operating efficiencies.
* The company is confident of delivering industry-leading double-digit revenue growth, driven by strong deal wins, a healthy deal pipeline and broad-based revenue growth. MTCL remains confident of delivering 20%+ EBITDAM in FY22.
* Deal wins remained healthy in Q3 at USD358mn (flat QoQ), taking the TCV of deals signed in 9MFY21 to ~USD1.2bn (21.5% YoY). Management indicated that the deal intake remains well-balanced across annuity and transformational deals.
* We raise our FY22E/23E/24E EPS by 3.4%/2.8%/0.5%, factoring in the Q3 operating performance beat. We maintain Hold rating on the stock with a TP of Rs4,550 at 36x Dec’23E EPS (Rs4,450 earlier).
What we liked? Broad-based revenue growth, healthy deal intake and margin beat amid supply-side challenges.
What we did not like? Uptick in LTM attrition (21.9% in Q3 vs. 17.7% in Q2FY22; quarterly annualized attrition was ~29.5% vs. ~27% in Q2FY22).
Revenue growth momentum remains healthy: Revenue grew by 4.7% QoQ (5.2% CC) in Q3, on the back of a strong broad-based demand environment, uptick in demand in CMT and TTH verticals, and a steady ramp-up of past deal wins. Revenue growth was broad-based, led by TTH (7% QoQ), CMT (6.1%) and BFSI (4.7%). RCM was flat sequentially after a stellar Q2, while Healthcare, the newly carved-out vertical, maintained its momentum and grew 23.7% QoQ albeit on a small base. Management is confident of sustaining the revenue growth momentum, driven by the strengthening of existing relationships with its clients, stitching new partnerships with strategic partners, and diversifying its offerings. The Top client grew 7.2% and management reiterated confidence in sustaining growth in the top account. Management reiterated its plan to widen the growth base by expanding relationships with other strategic accounts and reducing the dependency on the top client (Top 2-20 accounts grew 2.5%/41.6% QoQ/YoY). Management is confident of sustaining industry-leading double-digit revenue growth on broad-based robust demand, healthy deal intake, deal pipeline, aggressive customer mining, end-to-end digital capabilities, and disciplined execution.
Expects EBITDAM to sustain above 20%: Q3FY22 EBITDAM expanded by 100bps QoQ to 21.5% on benefits accruing from revenue momentum and operating efficiencies (+60bps) and cross-currency movement (+40bps). MTCL is confident of sustaining margins above 20%, supported by sustained revenue growth momentum, benefits accruing from the WFH shift, flattening employee pyramid (aiming to add 1,500 freshers per quarter, going ahead) and the offshore shift. These factors should negate the impact of rising costs of talent considering strong demand and tight job markets, and investments in front-end sales, and identified white space opportunities.
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