Buy Mindtree Ltd For Target Rs.1,599 - HDFC Securities
Mindtree has created a large-deal pursuit team to increase win rates in large deals in the range of $50-100 million with a significant part in managed services. Mindtree’s top client outlook remains strong and is likely to recover from Q3 with immense growth opportunities. Mindtree added eight new clients in Q2FY21 and total active clients stood at 283 as on September 30, 2020. It added one more client of $10 million client category, taking it to 24 such clients in total.
Mindtree has not seen any major impact of the COVID19 outbreak but the company has been efficiently managing from remote systems to ensure timely delivery of the outsourced business. Mindtree is focusing more on fixed price projects and cutting down tail projects. The results are also visible in terms of multiyear deal wins with higher annuity component, Company is also focusing on client mining, scaling up existing clients to US$50 million. This gives us comfort on its long term revenue growth trajectory.
Mindtree plans for transitioning the company from project based to more annuity base, which will give it flexibility in utilisation and pricing. This brings visibility on the long term earning growth. Despite higher incremental spends like investment in leadership, increase in discretionary spends and wage hike, the company aims to sustain margins at current levels.
Valuations and Recommendations:
Mindtree has become an integral part of the overall IT segment of L&T group. All the three IT entities of L&T (Mindtree, LTI and L&T Technology Services Limited) operate in synergies with each other and continue to see traction in Hi-tech and CPG verticals due to high demand in collaborative tools, adoption of cloud, data, SAP, IT modernization and workplace automation. Also the company is working closely with its clients in helping them deal with current pandemic and has launched several co-innovation initiatives. This coupled with green shoots in travel, vendor consolidation opportunities and transformational projects is expected to drive revenues.
Healthy order book, higher pipeline, strategy to drive large deals, hire tier 1 leaders to scale growth and expertise in digital technology provides visibility for long term growth. Mindtree desires to be the business transformation partner for all strategic clients delivering business outcomes and not just providing standalone technology solutions. Mindtree has collaborated with L&T Infotech on certain deals and is open to more such deals. However, the management denied the possibility of merger of the two entities at this point in time. Despite its smaller size, Mindtree reports lower OPM, PATM and RoE than its midsized and large peers.
We think the Base case fair value of the stock is Rs 1461 (21.0x FY22 EPS) and the bull case fair value of the stock is Rs 1599 (23.0x FY22 EPS) over the next 2 quarters. Investors can buy the stock in the Rs 1356-1362 band (19.5x FY22 EPS) and add further on dips to Rs. 1252- 1258 band (18.0xFY22E EPS). At the LTP of Rs 1427.2, stock trades at 20.5x FY22E EPS.
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