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Stellar revenue in 1QFY22, deal wins imply continuing momentum

Increased investments a drag on margin

* MTCL delivered another strong quarter, with USD CC revenue growth of 7.6% QoQ, above our estimate of 6.3%, led by broad based growth across client buckets. Deal TCV was at a record high of USD504m, with a growing proportion of annuity deals, which offers better revenue visibility, but having larger than usual renewal share.

* EBITDA margin fell 160bp QoQ, led by higher employee additions, increased subcontracting expenses (170bp), and greater visa costs (40bp), but partially offset by cross currency gains and higher revenue (50bp). EBIT margin benefitted from lower depreciation on amortization of some assets.

* The highest ever net addition in employee count (3,440, +14% QoQ) was despite a higher base in 4QFY21. This implies higher management conviction on a strong demand environment. We see MTCL benefitting from strong demand in Cloud (20% of revenue) and a recovery in TTH. Combined with strong deal wins in the last two quarters (average book-tobill of 1.5x), it should deliver USD revenue growth of 23% YoY in FY22, one of the highest in our coverage universe.

* This strong growth should help deliver 24% PAT growth in FY22E, despite a dip in EBITDA margin to 20.1% (-70bp YoY). We expect higher investments in Europe, along with an addition to the workforce, to limit margin at 20% levels in FY23E as well.

* We maintain our Neutral rating on the stock due to its fair valuations (25x FY23E P/E) as well as relatively higher client concentration (top account constitutes 27% of revenue).

* We upgrade our FY22E/FY23E EPS estimate by 4%/6% 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 normalization of utilization levels) and higher employee cost. The stock is currently trading at 25x FY23E EPS. The key positives are already captured, and we see limited upside hereafter. Our TP of INR2,620 per share implies 26x FY23E EPS. We maintain our Neutral rating.

Robust topline performance; deal wins at record highs

* In USD terms, revenue grew 23% YoY (est. 21%) in 1QFY22 to USD310.5m, EBIT grew 41% (in line) and PAT rose 61% to INR3.4b (est. 49%).

* In USD terms, revenue grew 7.7% QoQ to USD310.5m, above our estimate of 6.5% QoQ growth.

* Growth was broad based during 1QFY22, with Travel and Hospitality up 13% QoQ on a lower base; Retail and Manufacturing up 7.7%; Technology, Media, and Services up 6.9%; and the BFSI vertical up 6.4%.

* On the geographical side, growth was broad based with the US/Europe/RoW growing by 4.3%/8.6%/6.5% QoQ.

* Broad based growth was seen across all client baskets, with the top 6-10 clients witnessing 21% QoQ growth (the highest ever, crossed its 2QFY19 peak) and the top client growing by 5.4%.

* Deal wins stood at a record high of USD504m (1.6x book-to-bill) v/s the previous peak of USD393m.

* EBIT margin fell by 90bp QoQ to 17.7% (est. 18%).

* PAT rose 8% QoQ to INR3.4b, 8% ahead of our estimate on higher other income (INR589m v/s our estimate of INR226m).

* Offshore mix was at a multi-year high of 83.5% (+60bp QoQ), while utilization fell to 83.2% (-110bp QoQ).

* MTCL’s employee count rose 14% QoQ to 3,440, its highest ever. This on the back of a higher base of last quarter.

* Attrition (LTM) rose 160bp QoQ to 13.7%.

* DSO fell to 57 days v/s 67 days in 1QFY21.

* Free cash flow in 1QFY22 stood at INR973m, indicating an FCF/PAT of just 28%.

Key highlights from the management commentary

* The order book stood at USD504m in 1QFY22, up 32.4% QoQ, with a good mix of annuity and transformational deals. The record order book was on the back of MTCL’s differentiation and increasing market share.

* BFSI’s performance was on the back of deal closures, which were delayed to 1QFY22 as stated by the management in the preceding quarters. It said the segment is seeing a lot of consolidation. As a result, closures have slowed down, but it is confident of a recovery and ongoing traction in this space.

* MTCL is focusing on reducing the revenue concentration of its top client gradually as can be seen in past quarters. The management has initiated a program wherein it has focus accounts in its top 2-20 clients, where it has increased cross selling and up selling. It is confident that this strategy will help grow revenues further.

* The company reported an EBITDA/EBIT margin of 20.3%/17.7% in 1QFY22. The QoQ drop in EBITDA margin was due to: 1) highest ever net headcount addition (-170bp), and 2) greater visa costs (-40bp). This was partly offset by cross currency, increased revenue growth, and operational efficiency (+50bp).

Valuations fair, upside limited

* Since Jul’19, after the disruption due to the ownership change, MTCL has taken steps to stabilize its client and employee count.

* The management’s increased focus on annuity revenue and tail account rationalization is already reflected in revenue and client mix.

* A stable outlook for the top account, decent deal signings, and the ability to sustain improved margin are key positives.

* The stock is currently trading at 25x FY23E EPS. It has been one of the best performers in the IT sector in the last one year, with returns of 155%. The key positives are already captured, and we see limited upside hereafter. Our TP of INR2,620 per share implies 26x FY23E EPS. We maintain our Neutral rating

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