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Reassuring performance, valuations full

Demand intact, expect stable margin

MTCL reported a revenue of USD384m (+5.2% QoQ CC) in 4QFY22. Reported revenue grew 4.8% (inline), driven by broad-based growth across verticals and regions. Deal TCV rose 9% QoQ to USD390m in 4QFY22. The management reiterated that the demand environment continues to remain strong, and expects industry-leading growth in FY23.

EBITDA margin fell 50bp QoQ (inline) in 4QFY22 on higher utilization and offshoring. MTCL was largely able to sustain margin, despite wage costs and higher attrition at 23.8%  We view continued execution in both revenue growth and profitability as a key positive for the stock. We expect revenue to remain robust and margin to remain stable. We expect it to deliver 20% CAGR in USD revenue and 19% in INR PAT over FY22-24.

Net additions (~3.1k, total headcount up 9.7% QoQ) in 4QFY22 continue to remain robust. MTCL has now added ~11.2k employees in FY23, with a large share coming from freshers.

We maintain our Neutral rating on MTCL due to its fair valuations (28x FY24E P/E) as well as relatively higher client concentration (top client accounts for 24% of revenue), although it is moving in the right direction.

We raise our FY23/FY24 EPS estimate by 1.9%/1.4%. Our margin estimate is on the higher side of the over 20% range guided by the management, given it was able to sustain margin in 4QFY22, despite the headcount addition. As the stock is trading at 28x FY24E EPS, we see limited upside hereafter. Our TP of INR4,230/share implies 30x FY24E EPS. We maintain our Neutral rating

Inline result, higher other income

USD revenue grew 5.2% QoQ in CC terms, INR EBIT rose 40.2% YoY, and INR PAT increased by 49.1% YoY in 4QFY22.

USD revenue/INR EBIT/INR PAT grew 31%/40%/49% in FY22.

USD revenue rose 4.8% QoQ and 33.2% YoY to USD383.8m (inline).

Growth was broad-based in 4QFY22, while Retail and Manufacturing fell 3% on a sequential basis. Travel/BFSI/CMT rose 9.3%/8.9%/5.2% QoQ.

Geography-wise, growth was broad-based, with the US growing 5.6% QoQ, while Europe fell 0.3%. RoW reported a growth of 8.5% QoQ.

The top client grew 4.7% sequentially. The top two-to-five/top six-toten/non-top 10 accounts grew (fell) by 7.7%/(-4.1%)/5.7% QoQ.

Deal TCV was up 9% QoQ at USD390m in 4QFY22.

EBITDA margin fell 50bp QoQ to 21% (est. 21.1%). MTCL sustained margin, despite an addition of ~3,100 employees. Offshore ratio improved by 30bp to 86.3%

Net profit rose 8.1% QoQ to INR4.73b and was 7% above our estimates on a beat in other income and lower ETR.

Attrition (LTM) rose 190bp QoQ to 23.8%.

DSO for 4QFY22 was flat at 60 days as compared to 4QFY21 levels.

In 4QFY22, FCF/EBITDA and OCF/EBITDA stood ~83% and ~93%, respectively

Key highlights from the management commentary

MTCL continues to witness robust demand and iterated that demand is intact in the near term. Customers are looking at long-term transformational initiatives, with a long tail of growth, though the deal size may be smaller in nature.

The Communications, Media, and Technology verticals saw strong demand in product engineering, digital marketing, cyber security, and customer experience.  Retail faced impact of a ramp-down in one deal. The management reiterated that the demand environment remains strong.

BFSI is witnessing traction for core modernization and data integration services.

The Travel vertical crossed pre-COVID levels. Diversification in areas such as surface transport and food and beverage gives MTCL strong growth visibility at least in the near term.

The management has increased investments in new-age technologies like Metaverse, Blockchain, AR/VR, and low code – no code.

It is seeing cost pressures from supply-side challenges, but the company continues to offset that with operating efficiencies. Pyramid rationalization, reduced sub-contracting, and pricing continue to provide tailwinds, while there may be some headwinds on travel costs, which will accrue gradually over the next few quarters as travel resumes.

The management is confident of maintaining over 20% EBITDA margin on a structural basis.

Valuations fair, upside limited

The management’s increased focus on annuity revenue and strategic accounts is reflected in its revenue and client mix.

A strong outlook on strategic accounts, decent deal signings, and the ability to sustain improved margin are key positives.

The stock is currently trading at 28x FY24E EPS. As the key positives are already captured, we see limited upside hereafter. Our TP of INR4,230 per share implies 30x FY24E EPS. We maintain our Neutral rating.

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