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Growth outlook remains intact

We attended MTCL’s Analyst Day, where the management reiterated its 4x4x4 strategy and investments that the company is incurring to boost long-term growth. Here are the key highlights from the meet:

* The management reiterated its 4x4x4 strategy, with a focus on four industry groups, four service lines, and four geographies. Continuing with its four core industry groups, it will now segregate Healthcare as a separate vertical, given the strong deal traction in the same. The four service lines point to an elevated focus on Cloud.

* Within geographies, MTCL has made additional investments in Finland and Norway to increase its foothold in Europe. It is in the process of creating local/regional leadership in Europe, alluding that it will be a key growth driver for the business.

* The management displayed confidence of delivering both on the growth and profitability front. It maintained its guidance of double-digit industry-leading growth and EBITDA margin of over 20%, despite additional investments.

Focus on white spaces within key operating segments

* MTCL has identified white spaces within its core focus areas, where it will be investing to boost growth.

* Given the strong deal pipeline in Healthcare, MTCL will segregate the vertical while building its focus towards the non-Life Sciences part. It will work with the provider’s ecosystem to help them in their Digital transformation journey.

* While continuing its investing in Europe, it will also look at expanding in selective APAC (including Japan) and Middle East countries.

* Within service lines, MTCL will increase its focus towards Security, Enterprise applications, and IoT capabilities to leverage its incoming Digital projects/deals.

Growth will be beyond the top account

* Its top account has exhibited strong growth (31% CAGR) in the past three years and strengthened its partnership with one of the key hyperscalers in the Cloud ecosystem.

* This enhances MTCL’s capability as a key partner in the Enterprise Cloud journey. It has been consistently looking at participating in projects where it can gain the maximum benefit of Cloud multiplier revenue.

* While the top account will keep on demonstrating growth (despite strong acceleration in the past few years), a higher proportion of incremental growth should come from the non-top account. One of the key reasons for the same will be pent up demand in the Travel vertical, which fell 47% in FY21.

Strong margin expectation despite being in an investment phase

* We view the strategy of expanded regional focus and planned expansion into multiple white spaces as a lever to its medium-term revenue aspiration of growing above industry growth.

* Moderation in EBITDA margin (from 4QFY21 levels of 22%) will not be significant (relatively). In FY21, MTCL expanded its margin by 610bp, led by multiple industry and company-specific levers. Its guidance of over 20% EBITDA is impressive, given the expectation of a gradual return of travel expenses, shortage of key skill sets in the market, and required investments in the company.

Valuations fair, no room for further upside

* Since Jul’19, post the disruption pertaining to the ownership change, MTCL has taken steps to stabilize its client and employee counts.

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

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

* Consistent margin expansion and a positive outlook on the same are key positives. Higher exposure to the Travel, Transport, and Hospitality segments remain a drag on overall recovery.

* The stock is currently trading at 24x FY23E EPS. It has been one of the best performers in the IT sector in the last one-year, with returns of 148%. The key positives are already captured, and we see limited upside hereafter. Our TP stands at INR2,180/share. Maintain Neutral.

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