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Investor meet reinforces strong demand visibility

We attended MTCL’s annual investor meet, where the management reiterated its strong demand outlook and detailed the six strategic levers for FY23. It sees scope for continued performance in their 4x4x4 strategy and investments required to boost long-term growth. Here are the key highlights from the meet:

The demand outlook for the industry continues to remain strong. It has not seen any slowdown due to the recent inflationary concerns. This, aided by the ongoing shift of spends to Cloud-based migration from legacy, will help reallocate its technology expenses.

While there is still pressure on the supply-side due to lower fresher additions over the last few years, MTCL is not worried as demand is sufficient to absorb the cost pressures. The management reiterated its plan to maintain EBITDA margin ~20% and reinvest any savings in accelerating business growth.

The company introduced its six strategic levers for FY23, which they expect to boost their positioning. These are: a) full stack account, b) reimagine the ecosystem, c) shift from run IT to product IT ops, d) edge to experience for Industry X.0, e) enable industry convergence, and f) next-gen delivery capabilities for integrated solutions.

It also reiterated its 4x4x4 strategy (four industry groups, four service lines, and four geographies). It continues to see opportunities across industries and services. Including the evolving Healthcare vertical as the fifth industry unit, MTCL is seeing an increased trend of clients operating across industry lines and sees convergence as a key theme going forward.

Travel and Hospitality vertical continues to gain from the normalization theme. It is seeing strong spend interest from clients in this vertical.

Six strategic levers to help accelerate FY23 revenue growth

Build full stack accounts: Clients that were utilizing one-to-two services are increasingly using multiple capabilities to get the best outcome.

Reimagine the ecosystem: An entire Cloud ecosystem is coming up around hyperscalers. MTCL is undertaking sell to, sell with, and sell through with hyperscalers to capture expanded spending by clients.

Shift from run IT to product IT ops: Digitization of processes, with new models enabling detailed transformation to a product-led approach.

Edge to experience for Industry X.0: It acquired new capabilities with the acquisition of L&T NxT (now christened Mindtree NxT). It will offer digitization of the industry.

Enable industry convergence: Expansion of capabilities to address increased convergence in areas adjoining to the core industry of large clients.

Next-gen delivery capabilities for integrated solutions: It is building supply capabilities to address next-gen demand.

Other levers remain on track

The management reiterated the other levers it has been highlighting over the last two years, indicating continued scope in its 4x4x4 strategy, while adding Healthcare as a developing vertical. Geographical expansion has worked well, with Europe continuing to grow above the company level.

It also remains optimistic on key clients beyond their top account, with the top two to 40 accounts outgrowing it. The management reiterated its confidence that their focus 100 accounts (20 each in the five industry verticals) have good scope for further penetration

It also sees an improvement in partnership across key hyperscalers in the Cloud ecosystem, with a good position in both Azure and GCP.

Valuations factoring in its performance

The management’s increased focus on annuity revenue and tail account rationalization has delivered a good improvement in topline growth and profitability

We continue to see strong topline growth, driven by its actions and overall demand strength. With its focus on stable margin, we expect margin in FY23 to moderate slightly, limiting gains from operating leverage to earnings.

The stock is currently trading at 27x FY24E EPS. With a strong performance (+136%) in the last one-year, the key positives are already captured in the valuation. We see limited upside hereafter. Our TP stands at INR4,050/share, implying 29x FY24E EPS. We maintain our Neutral rating

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