* Mindtree reported strong Q3FY18 with 3.9% qoq growth in CC terms, driven by 3.8% qoq growth in pricing (led by several projects moving from transition to steady-state status). However, the management maintained a stable outlook for pricing on like-for-like basis.
* Digital revenue grew by 7% qoq (27% yoy), with deal wins up by 9.4% on TTM basis. Despite 7% qoq decline in total deal wins on TTM basis, the company is confident owing to its strong pipeline across verticals.
* Management expects similar growth and profitability in Q4FY18. It is confident about deal pipeline and capabilities on Digital front, but believes it is too early to conclusively give outlook for CY18. Management is also sanguine about gains in profitability gradually on the back of improved growth performance, business efficiencies, reduced losses in acquired entities and operating leverage.
* We largely retain our growth estimates given the soft deal traction and believe that the momentum will be slower than what management commentary suggests. We maintain our REDUCE rating with TP of Rs550, valuing it at 13x FY20E earnings.
Management expects similar performance in Q4; No clarity on FY19 outlook as of now
Mindtree reported strong results, with better-than-expected revenue growth and profitability . Strong growth was led by a sustained traction in Digital revenue (up 7% qoq; 27% yoy) and pricing gains of ~380bps qoq. Management believes that the pricing gains were on account of some projects transitioning to steady-state basis, wherein the billing rates get enhanced as the outsourcing partner takes over the complete project work from the client. Volume declined by 1.9% qoq oQ largely due to lower man-hours on account of furloughs and employee leaves – adjusted for the same, volume grew by 0.6% qoq. Despite weak new deal TCV addition on TTM basis (down 7% qoq), management is confident about its deal pipeline across verticals. It is witnessing slower adoption of Digital in its BFSI portfolio (but strong on run-the-business side) and robust innovation in Digital offerings for the Retail/CPG portfolio. Its acquired businesses, Bluefin/Magnet reported flat/positive growth and minor operational losses and management believes that the worst is over for these businesses. Management expects similar revenue (3-4% growth) and stable profitability (OPM for Q3FY18 was up 390bps qoq) for Q4FY18, but gave no clarity on the outlook beyond that.
Recovery to be gradual, lacks near term trigger; maintain REDUCE
We have built in 9% revenue growth CAGR and EBIT margin gains of about 140bps over FY18-20E. However, most of the growth would be back-ended and thus would lag near term trigger. We believe that the earnings performance would be slow and gradual, and thus we maintain our REDUCE rating on the stock with TP of Rs550 valued at 13x FY20E earnings.
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