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Healthy operating performance…

MindTree reported healthy set of Q3FY21 numbers and were above our estimates. The company reported dollar revenue growth of 5.0%QoQ above our estimate of 3.8% QoQ. The company registered EBITDA margin of 23.1% (up 286 bps QoQ mainly led by higher utilization and offshoring) and was higher than our expectation of 20.7%. The deal pipeline increased 3.0% QoQ and 50.7% YoY (due to low base last year) to US$312 million. The company added 368 employees in the quarter, its utilization increased by 430 bps QoQ to 83.1% and offshore effort mix increased by 70 bps QoQ to 82.8%.

Traction in digital, improving deal pipeline to drive growth

The company saw a healthy traction in deal pipeline and deal wins in the quarter. The company is also seeing improving deal pipeline in coming quarters and aspires to have industry leading growth. In addition, the company has a healthy digital portfolio making MindTree a key beneficiary of migration to cloud in coming quarters. In digital tech, the company is seeing healthy traction in cloud, data and analytics. Further, the company’s focus on annuity type deals, expansion in healthcare vertical and expansion in Europe bodes well for future revenue growth. In addition, green shoots in travel, vendor consolidation opportunities and traction in multi-year deals is expected to drive revenue growth. MindTree is also focusing on client mining and scaling up existing clients to US$50 million. This gives us comfort on the long term growth trajectory.

Margins continues to be healthy in long term

In Q4FY21E the company will see margin headwinds in the nature of wage hikes (impact of 250 bps) and utilisation. However, the company believes it will be able to maintain margins at 20% plus in coming years. Hence, we expect FY21E margins to improve 682 bps YoY to 20.5%. In the long term the company plans to invest to drive growth which could act as a margin headwind. However, the company also has long term levers like offshoring, cutting long tail accounts, fixed price projects, annuity type revenues and other cost rationalisation. This coupled with improving revenue growth we believe will boost margins by 50 bps to 21.0% over FY20-23E.

Valuation & Outlook

MindTree’s has seen healthy traction across verticals and clients. Going forward we expect the company to benefit from strong growth in digital technologies, vendor consolidation and multi-year transformation deals. This coupled with healthy margin trajectory bodes well for profit growth. Based on these factors, we maintain our BUY rating with a revised target price of | 1970/share (22x P/E on FY23E EPS) (earlier TP was | 1680).

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