Sell Mindtree Ltd For Target Rs.1,650 - Emkay Global
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Confident of delivering double-digit growth in FY22
* We attended MTCL’s Investor & Analyst Connect event wherein it reiterated its simple and focused 4*4*4 growth strategy with sharp focus on execution, which should help drive annuity revenue, large deals, and cross-selling and up-selling to strategic clients.
* The company is confident of delivering industry-leading double-digit revenue growth and 20%+ EBITDAM in FY22 on the back of healthy deal wins (USD1.4bn, 12.3% YoY), alltime high deal pipeline, and recovery in BFSI and TTH.
* MTCL has identified white space opportunities – health segment (focus on payer and medtech), security and enterprise applications, expansion into APAC/ME and Japan, and IoT capabilities (NxT-Digital acquisition) – to augment growth over the medium term.
* We have a Sell rating on the stock with a TP of Rs1,650 at 20x FY23E EPS, considering the rich valuation, dependency on top client and limited success in broadening revenue growth, and anticipated pressure on margins over the medium term.
4*4*4 growth strategy and addressing white space opportunities to drive profitable growth: MTCL has steadily executed on its well devised ‘4*4*4 strategy’ focusing on four industry groups (RCM, BFSI, TTH and CMT), four service lines (Customer Success, Data and Intelligence, Cloud and Enterprise IT) and four geographies (North America, UK & Ireland, Continental Europe, APAC & ME). It has identified six growth levers to drive growth in FY22 – 1) wallet share expansion, 2) doubling investments in Europe, 3) strengthening industry partnerships & consulting, 4) marketing & thought leadership to drive digital transformation, 5) addressing white space opportunities and 6) leveraging partnership with Hyperscalers.
MTCL sees immense revenue potential in its cloud business (USD1.5 for every USD1 spent by client with hyperscalers) and has put in place a team to capitalize on growth opportunities with each of the hyperscaler. MTCL remains confident of delivering double-digit growth in FY22 on the back of strong deal wins (USD1.4bn in FY21, 12.3% YoY), healthy deal pipeline, account mining and multi-year annuity deals.
Margins to sustain even as MTCL looks to reinvest in the business:
In order to drive operating efficiencies, MTCL has launched a program, which yielded desired results in the last few quarters (EBITDAM expanded from 10.0% in Q1FY20 to 21.9% in Q4FY21), and management expects it to continue to drive positive results. MTCL is confident of sustaining margins above 20% on the back of anticipated revenue acceleration, growing outcome-based engagements, benefits accruing from WFH shift, operating efficiencies, flattening pyramid and offshore shift. These factors should negate the impact of rising delivery costs with tight job markets, investments in front-sales team and identified white space opportunities, and normalization of travel costs in H2.
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