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Mindtree (NS:MINT): Mindtree (MTCL IN) delivered slightly lower-than-estimated revenue and in-line margins in Q4. The sequential growth of 5.2% CC (similar to Q3) followed four consecutive quarters of 5%+ sequential growth, supported by broad-based momentum across service lines. Mindtree’s improvement in consistency (both growth/margin) and predictability (though not fully with disconnect between TCV/growth on short cycle deals) is led by (1) building full-stack account and account mining focus (top-100 driving 90% of revenue as well as reduced T1 concentration risk) and (2) focus on building partner ecosystem and hyperscaler proposition (MTCL has strong rating within leading cloud providers). Despite modest deal booking metrics and continuity of tail rationalisation pointing to growth moderating in FY23 (on a strong FY22 growth base), we expect MTCL to deliver a high-teen growth CAGR (reach USD 2bn annual rate by H2FY24E), supported by expansion into Continental Europe and core portfolio focus (cross-sell), with predictable margins (management maintained 20%+ EBITDAM outlook).
Maintain ADD with a TP of INR 4,855, valuing MTCL at 35x (~20% premium to 3Y average) FY24E EPS.
Steady progression
Mindtree (MTCL IN) delivered slightly lower-than-estimated revenue and in- line margins in Q4. The sequential growth of 5.2% CC (similar to Q3) followed four consecutive quarters of 5%+ sequential growth, supported by broad-based momentum across service lines. Mindtree’s improvement in consistency (both growth/margin) and predictability (though not fully with disconnect between TCV/growth on short cycle deals) is led by (1) building full-stack account and account mining focus (top-100 driving 90% of revenue as well as reduced T1 concentration risk) and (2) focus on building partner ecosystem and hyperscaler proposition (MTCL has strong rating within leading cloud providers). Despite modest deal booking metrics and continuity of tail rationalisation pointing to growth moderating in FY23 (on a strong FY22 growth base), we expect MTCL to deliver a high-teen growth CAGR (reach USD 2bn annual rate by H2FY24E), supported by expansion into Continental Europe and core portfolio focus (cross-sell), with predictable margins (management maintained 20%+ EBITDAM outlook). Maintain ADD with a TP of INR 4,855, valuing MTCL at 35x (~20% premium to 3Y average) FY24E EPS.
Q4FY22 highlights: (1) MTCL reported fifth consecutive quarter of revenue growth of > 5% QoQ CC at USD 384mn (marginally below our estimate of USD 386mn), +4.7% QoQ in USD terms (+5.2% QoQ CC), led by healthy growth in both top and non-top accounts (+4.7% QoQ each). (2) EBITDAM declined by 54bps QoQ to 21% due to higher employee cost and travel cost. (3) Among the verticals, growth was led by travel (+9.2% QoQ; FY22 revenue at pre-COVID level), BFSI (+8.9% QoQ; supported by core modernisation); and communications, media & tech (+5.3% QoQ; supported by product engineering). However, retail, CPG, and manufacturing declined -2.3% QoQ, impacted by ramp-down in retail client. (4) Deal TCV in FY22 was at USD 1.6bn, 16.7% YoY (book to bill at 1.14x compared to 1.28x in FY21). (5) MTCL had a net headcount addition of 3,112 in Q4 (47% increase in FY22) and it intends to add more fresh graduates in FY23E. (6) MTCL will roll out a wage hike in Q2FY23E.
Outlook We have factored in USD revenue growth of +20.0/+17.8% and EBITDA at 20.5% each for FY23/24E. We expect an EPS CAGR of 17% over FY22-24E and RoCE of >30% to support the valuation
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