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Strong quarter; growth momentum continues

Mindtree Ltd is an information technology (IT) consulting and implementation company focusing on select verticals viz. BFSI, Retail, Travel & Hospitality and Hi-Tech.

* Q2FY23 revenue rose 31.5% YoY to Rs. 3,400cr led by strong growth across most of the segments except Retail, CPG and Manufacturing.

* EBITDA grew 31.3% YoY despite wage hikes, while margin remained broadly flat at 20.5%. The PAT grew 27.5% YoY to Rs. 509cr.

* Mindtree has a resilient business structure with strong and efficient execution capabilities. The growth momentum is expected to continue, backed by a robust order book. We hereby upgrade our rating to BUY with a revised target price of Rs. 3,860 based on 28x FY24E adj. EPS.

Strong performance across industries

Revenue grew 31.5% YoY to Rs. 3,400cr in Q2FY23 owing to strong revenue growth across verticals except Retail, CPG and Manufacturing which fell 11.5% YoY. BFSI rose 33.3% YoY, followed by High Technology and Media (23.3% YoY) and Travel and Hospitality (41.9% YoY). In terms of revenue mix by service lines, Customer Success contributed 40.7%, Data and Intelligence 16.1%, Cloud 20.3% and Enterprise IT 22.9%. On a geographical basis, North America grew 29.4% YoY, while Continental Europe fell 6.6% YoY as well as the UK and Ireland by 26.7%. Revenue from Top 5 clients grew 39.8% YoY (contributed 36.9% to revenue) and Top 10 clients increased 20.4% (45%) in Q2FY23. EBITDA witnessed 31.3% YoY growth to Rs. 697cr in Q2FY23 despite wage hikes, while EBITDA margin remained resilient at 20.5%. Adj. PAT rose 27.5% YoY to Rs. 509cr.

Key concall highlights

* Mindtree order book grew sharply by 44% YoY to USD 518mn, with H1 signings crossing USD 1bn for the first time.

* Employee headcount increased 28.8% YoY and 2.2% QoQ to 38,290, with a trailing 12-month attrition rate of 24.1%.

* Management indicated the reporting would likely be on combined entity basis from Q2FY23 onwards if all necessary legal approvals are received on time.

Mindtree-LTI merger nearing completion

Company’s merger with L&T Infotech remains on track to be completed by FY22-end, that is, during the next 1-2 quarters. The strengths of the two entities – supply chain transformation in case of LTI, and customer satisfaction transformation for Mindtree – complement each other very well and should aid growth for the combined entity going forward. Post completion, the focus would be on driving efficiencies in terms of cost reduction, with attrition seen moderating for Mindtree.

Valuation

Robust order book comprising of a healthy mix of annuity and transformational deals, coupled with strong execution capabilities, is expected to drive growth across verticals. Mindtree continues to see strong momentum in digital transformation and cloud related deals. Further, the Mindtree-LTI merger will provide a competitive advantage, improve capabilities, and boost access to a larger comprehensive portfolio of global clients and cost synergies, etc. We upgrade our rating to BUY on the stock with a revised target price of Rs. 3,860 based on 28x FY24E adj. EPS.

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