01-01-1970 12:00 AM | Source: Emkay Global Financial Services Ltd
Sell Mindtree Ltd For Target Rs. 3,300 - Emkay Global
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All-round beat

* Q2FY22 operating performance beat our expectations. Revenue grew 12.8% QoQ to USD350.1mn (13.4% CC). EBITDAM expanded ~20bps QoQ to 20.5% on the back of revenue acceleration and operating efficiencies, which negated the salary hike impact.

* The company is confident of delivering industry-leading double-digit revenue growth on the back of strong deal wins, healthy deal pipeline and broad-based revenue growth. MTCL remains confident of delivering 20%+ EBITDAM in FY22.

* Deal wins remained healthy in Q2 at USD360mn, albeit moderated a bit from record USD504n in Q1. Management indicated that the deal intake remains well-balanced across annuity and transformational deals.

* We raise our FY22E/23E/24E EPS by 7.5%/8.4%/7.9%, factoring in Q2 performance beat. We maintain Sell on the stock with a revised TP of Rs3,300 at 30x Sep’23E EPS (earlier Rs3,070), considering rich valuations and anticipated pressure on margins.

 

What we liked?

Broad-based revenue growth, healthy deal intake What we did not like? Uptick in LTM attrition (17.7% in Q2 vs. 13.7% QoQ; quarterly annualized attrition was ~27%)

 

Revenue growth momentum accelerates further:

Revenue grew 12.8% QoQ (13.4% CC) in Q2 on the back of a strong broad-based demand environment, seasonal uptick in demand in retail & CPG, and steady ramp-up of past deal wins. Revenue growth was broad-based, led by Retail, CPG & Manufacturing (29.6% QoQ), TTH (14.4%), BFSI (8.4%), and CMT (5.6%). Healthcare, the newly carved out vertical, grew 24% QoQ on a small base.

Management indicated that strength in Retail, CPG and Manufacturing was partly seasonal as businesses had just started opening up for retail and in-person shopping after an extended lockdown. The Top client remained flat QoQ. Management reiterated confidence in growing the top account and widening the growth base by expanding relationships with other strategic accounts (Top 2-20 accounts grew 19% QoQ). Management is confident of delivering industry-leading double-digit revenue growth in FY22 on the back of broad-based demand, healthy deal intake, deal pipeline and disciplined execution.

 

Expects FY22 EBITDAM to sustain above 20%:

Q2FY22 EBITDAM expanded 20bps QoQ to 20.5% on the back of revenue acceleration and operating efficiencies (+190bps), partly offset by wage hikes (-140bps) and the cross-currency (-30bps) impact. MTCL is confident of sustaining margins above 20% on the back of sustained revenue growth momentum, benefits accruing from WFH shift, flattening pyramid (added more than 2000 freshers in H1) and offshore shift. These factors should negate the impact of 1) rising costs of talent, 2) higher subcontracting costs considering strong demand and tight job markets, and 3) investments in front-end sales and identified white space opportunities.

 

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