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Stellar performance and outlook, but valuations rich

Strong margin despite wage revisions

* MTCL delivered another excellent quarter, with a revenue of USD350m (+12.8% QoQ, est. 8.3%), driven by broad based growth across verticals and regions. The only pocket of weakness in 2QFY22 was in its top client (flat QoQ), which now accounts for 24% of revenue (exposure down by ~600bp v/s the peak in 1QFY21). Deal TCV stood at USD360m (-29% QoQ/+19% YoY), with a good mix of annuity and transformational deals.

* EBITDA margin rose 20bp sequentially, despite the impact from a wage hike. Margin in 2QFY22 was aided by operating leverage and currency benefits, which was partially offset by a wage hike (~140bp QoQ). EBIT margin benefitted from lower depreciation, given the strong growth.

* Net additions (2,476, +9% QoQ) were strong in 2QFY22. MTCL added ~2k freshers in 2HFY22, which is expected to continue. During our AGIC, the management had indicated that it plans to hire 4-5k freshers in FY22. This implies continued management conviction on the demand environment.

* The management reiterated that the demand environment continues to remain strong and expects industry-leading growth in FY22. We see MTCL benefitting from strong demand in Cloud (19% of revenue) and broad based growth across verticals. We expect USD revenue growth of ~30% YoY in FY22, one of the highest in our coverage universe.

* This strong growth should help deliver 41.5% EPS growth in FY22, given a flattish EBITDA margin of 20.6% (-20bp YoY).

* We maintain our Neutral rating on the stock due to its fair valuations (37x FY23E P/E) as well as relatively higher client concentration (top account constitutes 24% of revenue), although it is moving in the right direction.

* We upgrade our FY22E/FY23E EPS estimate by ~7% as we raise our growth estimates on the back of a beat in 2Q FY22 and strong management commentary for FY22E. Our margin estimates are slightly higher, given the strong margin performance in 2QFY22, despite the wage hike. The stock is trading at 37x FY23E EPS and we see limited upside hereafter. Our TP of INR4,460 per share implies 38x FY23E EPS. We maintain our Neutral rating.

Robust performance across line items

* In USD terms, revenue grew 34% YoY (est. 29%) to USD350.1m, EBIT rose 46% (est. 30.2%) and PAT increased by 57% (est. 33%) to INR4b in 2QFY22.

* For 1HFY22, USD revenue/INR EBIT/INR PAT grew by 28%/44%/59%

* MTCL’s USD revenue grew 12.8% QoQ to USD350.1m, above our estimate of 8.3% QoQ growth.

* Growth was broad based during 2QFY22, with Retail and Manufacturing leading growth at 29.4% QoQ, followed by Travel (+14.4%), BFSI (+8.6%), and CMT (+5.6%).

* On the geography-side, growth was broad based with the US growing 7.2% QoQ. Europe grew 36.4% QoQ, led by strong growth in the UK. RoW reported a growth of 19% QoQ.

* Its top client was flat sequentially as it was impacted by seasonality, while growth was driven by strong performance from the top 2-5/top 6-10/non-top 10 accounts, which grew 15.8%/17.8%/17.9% QoQ.

* Deal wins stood at USD360m (1x book-to bill ratio), -29% QoQ/+19% YoY.

* EBIT margin increased by 70bp QoQ to 18.2% (est. of 17%).

* PAT at INR4b (+16% QoQ) was 18% ahead of our estimate on revenue and margin beat, coupled with higher other income and lower ETR.

* Offshore mix was at multi-year high of 85% (+150bp QoQ), while utilization fell to 82.9% (-30bp QoQ).

* MTCL added 2,476 employees, up 9% QoQ. Headcount addition continues to be strong for the past three quarters.

* Attrition (LTM) is up 400bp QoQ to 17.7%.

* DSO fell to 63 days as compared to 57 days in 2QFY21.

* In 1HFY22, OCF/EBITDA stood at 43% and FCF/EBITDA stood at 38%.

Key highlights from the management commentary

* At a broad level, MTCL continues to witness robust demand. Customers are looking at long term transformational initiatives. Technology, which was earlier used for generating greater cost efficiencies, is now being used to drive topline performance. The management maintains it will clock industry-leading growth in FY22.

* The Retail, CPG, and Manufacturing vertical witnessed strong sequential growth (29.6% QoQ), aided by seasonality and pent up demand, led by project backlog.

* MTCL has been investing in Europe for the past 12 months. The fructification of investments has resulted in strong growth in Europe. Within verticals, the Manufacturing and Retail segment contributed to growth in Europe.

* The company reported an EBITDA margin of 20.5% (+20bp QoQ) and an EBIT margin of 18.2% (+50bp QoQ). EBITDA margin was aided by a currency benefit (20bp) and operating leverage, which was partially offset by the impact from a wage hike (140bp).

* The management sees revenue growth coming in at a decent margin. There is cost pressure from supply-side challenges, but the company continues to offset that with operating efficiencies. Pyramid rationalization and reduced sub-contracting are key pillars of its operating efficiency program. There may be volatility in quarterly margin, but on a structural basis, the management is confident of maintaining EBITDA margin over 20%.

Valuations fair, upside limited

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

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

* The stock is currently trading at 37x FY23E EPS. It has been one of the best performers in the IT sector in the last one-year, with returns of 175%. The key positives are already captured and we see limited upside hereafter. Our TP of INR4,460 per share implies 38x FY23E EPS. We maintain our Neutral rating.

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