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Growth in-line, margins lower due to one-offs; maintaining a Buy

With revenue up 2.4% q/q (~1% from pass-throughs) to ~$1,047m, LTI- Mindtree grew on par with the industry and in line with our expectations. TCV was $1.25bn, a book-to-bill of 1.2x (Mindtree operated in the past at 1.2x). The EBIT margin was lower due to more Hi-tech furloughs, employee costs and integration costs which may not recur in Q4, leading to management guidance of a 200bp expansion in Q4. Attrition moved down further and industry tailwinds are likely to continue. Estimates are largely unchanged with a revised TP of Rs5,520 (from Rs5,630) at 26x (unchanged) FY25e.

Large deal pipeline at record high, Q3 revenues affected by furloughs. Q3 revenue was up 2.4% q/q, 13.8% y/y, largely driven by Manufacturing & resources (up 10.5% q/q) and BFSI (up 5.7% q/q). Weakness was seen in Hi- tech (down 4/7% q/q) due to furloughs but the company is confident of recovering in Q4. The company is seeing deferred demand in certain projects and delays in decision-making but is yet confident of growth, given its current pipeline. It is also experiencing an increase in cost take-out deals.

EBIT margin to expand 200-250bps in Q4. In Q3, the EBIT margin was down ~260bps q/q, 360bps y/y (on adj. for M&A cost: 100bps) to 14.9%. This was largely due to furloughs (130bps) and rises in employee costs (130bps). The latter was higher due to ESOPs to top management and increments to fresh graduates. As some of these are non-recurring, Management guided to a 200- 250bp margin expansion in Q4. Utilisation incl. trainees (est.) was 81.5% and offers headroom for improvement. Headcount moved down 474 in Q3 to 86,462; attrition also moved down, to 22.3% from 24.1% in Q2. We expect net addition to turn positive given current utilisation.

Retaining a Buy. We expect LTIM to deliver a 13% revenue CAGR over FY23-25 and increase EBIT margins to ~18% by FY25, from 16.3% in FY23, leading to a 20% EBIT CAGR. This would result in an EPS of Rs.213 for FY25. The stock trades at FY25e PE of 20x which we find attractive; our target is based on 26x FY25e EPS (Rs5,520). Risks: Continued headwinds in Hi-tech; high integration costs.

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