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Strong operating performance; merger with LTI to conclude by Dec’22

Result Synopsis

Mindtree (MTCL) reported strong financial performance for the quarter. While, the revenue growth was above estimate, EBIT margin came inline. It reported constant currency growth of 7.2% QoQ, led by BFSI( up 10.2% QoQ ) and Travel and Transportation( up 8.8% QoQ). The INR reported growth of 8.9% QoQ was supported by depreciation of INR by 3.4% QoQ vs USD. There was sequential decline in EBIT margin(down 59 bps QoQ) led by impact of wage hike in the quarter. There was slight moderation in employee attrition as LTM attrition was down 40 bps QoQ to 24.1%.

While, the long term demand story remains robust, there is some softness in near term in certain sectors like manufacturing, Retail and Logistics as the clients have become watchful of the evolving macroeconomic situation and thus resulting in more time for decision making for new deals. Employee attrition has started moderating and should support operating margin going ahead We estimate revenue CAGR of 19.6% over FY22? 24E with average EBIT margin of 18.4%. We maintain our ADD rating on the stock with revised target price of Rs 3,705/share at 28.0x on FY24E EPS. We have slightly increased our target multiple from 27.0x to 28.0x to account for significant revenue and cost synergies post merger with LTI. The stock trades at PER of 28.1x/25.1x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 34bn( up 8.9% QoQ in INR terms, up 5.7% QoQ in USD terms). The strong sequential growth was led by BFSI( up 10.2% QoQ), Travel and Transportation( up 8.8% QoQ). In terms of service lines, Cloud had maximum sequential growth at 9.9% QoQ. The cc growth was 7.2% QoQ for the quarter. Continental Europe reported 9.1% QoQ decline in revenue led by cross currency headwinds

* EBIT margin declined by 59 bps QoQ to 18.6%, led by impact of wage hike in the quarter.

* Reported deal TCV of $518mn for the quarter( up 44% YoY)

* Added 8 clients in the quarter compared to 13 in Q1FY23. Revenue from top client increased 30 bps QoQ to 26.3%. Offshore effort mix was down 10 bps QoQ to 86.5%

* Number of employees grew by 835 QoQ to 38,290. LTM attrition came down by 40 bps QoQ to 24.1%. Utilization was down 50 bps QoQ to 80.7%. DSO was flat QoQ at 50 days

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