Double-digit growth likely in FY22 on back of demand and robust execution; ‘Buy’ retained with TP of Rs 2,850
Mindtree (MTCL) delivered a strong set of Q1FY22 numbers–revenue grew 7.7% (7.6% in CC) q-o-q to $310.5 mn, in line with our $311.0 mn estimate, but well above Street’s $302.0 mn estimate. Margin at 17.7% was broadly in line with our/Street’s estimate of 17.8%. Net profit grew 8.2% q-o-q surpassing Street’s estimate. Deal wins were highest ever at $504 mn.
The company is witnessing accelerated adoption of digital and robust pipeline across industries. We believe strong demand and robust execution will lead to industry leading profitable double-digit growth in FY22. We revise our TP to Rs 2,850 (from Rs 2,821) as we roll forward to Q3FY23e. Maintain Buy.
Robust broad-based growth: Mindtree reported strong growth momentum across all service lines, which sets a solid base for rest of the year. All segments reported strong growth on q-o-q basis led by Travel, Transportation & Hospitality at 13.1% q-o-q, Retail, CPG & Manufacturing grew 7.7% q-o-q and Communications, Media & Technology grew 6.9%. Amongst geographies, Continental Europe led growth with 30.4% q-o-q, followed by North America at 7.7% q-o-q. LTM attrition increased 160bps q-o-q to 13.7%. Sustained efforts in collections led to DSO reducing by three to 57 days.
Digital acceleration driving growth: Ebitda margin at 20.3% fell 160bps q-o-q primarily due to headwind of headcount addition (170bps) and visa cost (40bps), which were partially offset by forex and operational efficiency (40bps). Net headcount increased by 3,442 (highest ever in a quarter) to 27,256. Sub-contracting cost doubled y-o-y. Mgmt believes this cost is likely to remain elevated in the short term, but will moderate as it trains freshers and ramps up internal capabilities. MTCL will again increase wages up to mid-management level. Despite these headwinds, management reiterated commitment to deliver more than 20% margin in FY22 using various cost levers and operating leverage.
Outlook: Strong execution capabilities: We remain confident of MTCL’s long-term prospects driven by sustainable growth and execution capabilities. We believe it is strongly positioned to benefit immensely from this strong tech-upcycle. The stock trades at 27.8x FY22e. We maintain ‘BUY/SO’ with revised TP of Rs 2,850 (35x Q3FY23e) based on its strong growth prospects.