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Neutral Mindtree Ltd For Target Rs.2,180

Strong 4QFY21, tailwind from the Travel vertical to boost growth in FY22E

Current valuations fairly pricing in growth

* Mindtree (MTCL) delivered another strong quarter, with USD revenue growth of 5.1% QoQ, above our estimate of 4.3%, driven by robust growth outside of the top 10 accounts (+8.6% QoQ USD) and end of discounts in the Travel and Hospitality vertical (+17% QoQ USD). Deal TCV rose 20% QoQ to USD375m in 4QFY21 and the management indicated that deal pipeline is at a record high.

* It was able to deliver better than expected EBIT margin in 4QFY21 (18.6%, down 100bp QoQ) as wage hike impact (-240bp QoQ) was partially compensated by operational efficiency and higher utilization (84.3%, +120bp QoQ).

* While 4QFY21 growth was aided by end of discounts in the Travel vertical, FY22 should be broad based on scaling of deals in BFSI and return of business in the Travel industry. We see MTCL benefitting from strong demand in Cloud (19% of revenue) and in its top account. Combined with a strong 2HFY21 exit, it should deliver USD revenue growth of 19% YoY, one of the highest in our coverage universe.

* This strong growth should help the company maintain its EBITDA margin at 20.8% (flat YoY), despite higher investment in sales, selective employee interventions, and significant ramp up in its employee base (to bring down historical high utilization).

* We maintain our Neutral rating on the stock due to higher client concentration (top account constitutes 28% of revenue), lack of growth in the top 2-10 accounts, and fair valuations (23x FY23E P/E).

* Cash conversion remained strong in 4QFY21 as well (100% FCF/PAT ratio) led by robust operating income and lower capex. In FY21, reported revenue (USD)/EBIT/PAT in IT Services moved by -1.1%/62%/76%.

* We upgrade our FY22E/FY23E EPS estimate by 3%/4% as we increase our growth estimates on the back of a strong deal pipeline and expectations of decent conversions in FY22E. This will be partially offset by expectations of lower margin on account of normalization of utilization levels and investments. The stock is trading at 22.6x FY23E EPS. The key positives are already captured, and we see limited upside hereafter. Our TP of INR2,180 per share implies 24x FY23E EPS. Maintain Neutral.

Strong all-round beat

* USD revenue grew 5.1% QoQ to USD288.2m, above our estimate of 4.3%.

* EBIT margin reduced by 100bp QoQ to 18.6% (v/s our expectation of 17.7%), despite an impact from a full wage hike cycle.

* The impact of the wage hike was offset by a 120bp sequential increase in utilization (which was at a record high) and a 10bp increase in offshore mix.

* MTCL added over 1,600 employees, its highest ever.

* PAT declined 2.8% QoQ, but increased by 53.9% YoY, to INR3.2b, as against our expectation of INR2.8b. This was primarily due to higher operational income and lower ETR (24.2% v/s our estimate of 26.5%).

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