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Good 3QFY22 performance, but valuations remains rich

Margin to moderate in FY23 on a pickup in investment

* MTCL reported a revenue of USD366m (+5.2% QoQ CC) in 3QFY22, above our estimate of 3.5% QoQ growth, driven by broad based growth across verticals and regions. Deal TCV in 3QFY22 was stable at USD358m, with a good mix of annuity and transformational deals. The management reiterated that the demand environment continues to remain strong, and expects industry leading growth in FY22.

* EBITDA margin rose an impressive 100bp QoQ (above our expectation of a 30bp increase) in 3QFY22 on lower subcontracting spends and control on operational costs. MTCL achieved this despite continued pressure on wages and elevated attrition (21.9%, +420bp QoQ).

* We view continued execution on both revenue growth and profitability as a key positive for the stock. While we expect its topline to remain robust, EBIT margin should start stabilizing due to increased investment after expanding by 540bp in the last eight quarters. We expect it to deliver a FY22-24E CAGR of 20% in USD revenue and 19% in INR PAT.

* Net additions (2,227, +7.5% QoQ) in 3QFY22 continue to remain high. MTCL has now added ~8k employees in 9MFY22, with a large share coming from freshers, which it expects to continue. The management highlighted increased fresher intake (+40-50%) in FY23.

* We maintain our Neutral rating on MTCL due to its fair valuations (40x FY23E P/E) as well as relatively higher client concentration (top client accounts for 24% of revenue), although it is moving in the right direction. USD revenue/EBIT/PAT grew 30.3%/39.6%/48.7% YoY in 9MFY22.

* We raise our FY22-24E EPS estimate by 3% as we upgrade our growth estimate on the back of a 3QFY22 beat. Our margin estimate is on the higher side of the over 20% range guided by the management, given its strong margin performance in 3QFY22, despite its lower utilization. The stock is trading at 40x FY23E EPS and we see limited upside hereafter. Our TP of INR4,880/share implies 35x FY24E EPS. We maintain our Neutral rating.

Broad base beat in 3QFY22

* USD revenue grew 5.2% QoQ in CC terms, INR EBIT rose 33.5% YoY, and INR PAT increased by 34% YoY in 3QFY22.

* USD revenue rose 4.7% QoQ and 33.7% YoY to USD366.4m, ahead of our estimate of 3.1%.

* Growth was broad based in 3Q, while Retail and Manufacturing was flat after a strong 29.4% growth in 2QFY22. Travel/BFSI/CMT was up 7%/4.7% /6.1% QoQ.

* On the geographical side, growth was broad based with the US growing 4.9% QoQ, while Europe moderated (0.7%) after a very strong 2QFY22. RoW reported a growth of 15.7% QoQ.

* Top client grew 7.2% sequentially. The top 2-5/top 6-10/non-top 10 accounts grew (declined) by (3.6%)/5.8%/5% QoQ.

* Deal TCV stood flat QoQ at USD358m in 3QFY22.

* EBITDA margin rose 100bp QoQ to 21.5% (est. 20.8%). Margin was a beat despite an addition of 2,200 employees and 140bp QoQ dip in utilization. Offshore ratio improved by 100bp to 86% (multi-year high).

* Net profit rose 9.7% QoQ to INR4.37b and was 7% above our estimate due to topline and margin beat, higher other income, and lower ETR.

* Attrition (LTM) rose 420bp QoQ to 21.9%.

* DSO for 3QFY22 was 64 days as compared to 61 days in 3QFY21.

* In 3QFY22, FCF/EBITDA stood ~77% and OCF/EBITDA was ~87%.

Key highlights from the management commentary

* At a broad level, MTCL continues to witness robust demand. Customers are looking at long term transformational initiatives, with a long tail of growth, though the deal size may be smaller in nature. These smaller sized deals do not reflect in the pipeline, but are part of larger transformation initiatives and will drive near term growth. The management reiterated that it will clock industryleading growth in FY22.

* The Communications, Media, and Technology vertical saw strong demand in core modernization, 5G, edge devices, content chain, and IoT.

* Retail was impacted by seasonality in 3QFY22. The management reiterated that the demand environment remains strong and indicated a robust recovery in 4QFY22. The traction in consumer experience, core modernization, and supply chain continues.

* BFSI is witnessing traction for core modernization, Digital engineering, and modernization of legacy infrastructure.

* The Travel vertical again witnessed strong growth. Diversification in areas such as surface transport, food and beverage, and car rentals gives MTCL strong growth visibility at least in the near term.

* MTCL reported an EBITDA margin of 21.5% (+100bp QoQ) and an EBIT margin of 19.2% (+100bp). EBITDA margin was aided by a currency benefit (40bp) and operating leverage (60bp). The management intends to reinvest profits over this 20% margin whenever opportunities exist.

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 40x FY23E EPS. As the key positives are already captured, we see limited upside hereafter. Our TP of INR4,880 per share implies 35x FY24E EPS. We maintain our Neutral rating

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