Mindtree Rating | Neutral — Despite multiple positives, valuations leave no margin of safety

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Published: January 20, 2020 1:45:46 AM

The recent sharp rally in the stock price and rich multiples (19x one year forward P/E) already factor in the key positives

mindtree, mindtree ratingSoftness in deal signings is due to deferrals in decision-making driven by furloughs.

Strong growth at top account (+26% y-o-y) and better-than-expected operational optimisation assuage concerns about ownership and management transition. Early signs of success related to strategy refresh (e.g. increasing revenue share from fixed-price contracts) are now visible. As mix incrementally shifts toward annuity revenue, we see headroom for further

(i) utilisation improvement, (ii) pyramid correction and (iii) reduction in sales intensity. However, the impact of this should be offset by correction in higher yields (vs. peers). The recent sharp rally in the stock price and rich multiples (19x one year forward P/E) already factor in the key positives, in our view. Given the softness in deal wins this quarter and increasing client concentration, we await a better entry point. Maintain Neutral.

Surprise on margins, top account growth: Revenue was up 9.4% y-o-y to $275 m (marginal miss). Ebit declined 2.4% y-o-y and PAT increased ~14% y-o-y to `1,970 m. This was led by sharp growth acceleration at top account (26% y-o-y v/s 12% y-o-y in Q2). Share of revenue from fixed-price contracts increased ~280bp
q-o-q to ~59%. Strong beat on Ebit margin was driven by better-than-expected operational optimisation and projects moving from transition to steady state.

Company is optimistic on deal closures: Softness in deal signings is due to deferrals in decision-making driven by furloughs. However, MTCL continues to see positive deal momentum and is optimistic about deal closures in Q4FY20. Current Ebit margins (12%) are sustainable. More importantly, MTCL re-iterated its emphasis on further margin improvement in a gradual manner. We build in 120bp margin expansion over FY20-22.

Motilal Oswal

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