MTCL’s Q1FY23 performance beat consensus estimates at both revenue and margin levels. Revenue at $399 mn was up 5.5% q-o-q in cc terms (vs. consensus expectation of 4.8% q-o-q growth) and EBIT margin at 19.2% was up 30bps (vs. consensus expectation of 18.8%). EPS at Rs 28.57 was up 37% y-o-y.
Revenue performance was strong considering weakness in the retail vertical
MTCL’s growth was across all verticals except for retail which recorded -8.9% q-o-q decline (in USD terms) due to two client-specific issues. The total contract value (TCV) of deal wins at $570 mn was up 13% y-o-y in Q1FY23 with a reasonable mix of annuity and transformation deals. MTCL noted that there could be a few pockets of weakness in certain clients impacted by ongoing macro-economic turmoil but at the aggregate portfolio level, it does not see any cause for concern over growth in the near term.
Margins impressive; positioning itself to sustain supply side issues
Ebitda margin improved a modest 10bps q-o-q to 21.1% (headwinds: 50bps from visa costs, 60bps from expenses related to the merger with LTI cushioned by tailwinds: 70bps currency and 50bps from operational efficiency). At the EBIT level, margin was 19.2% (30bps q-o-q). MTCL’s effort to increase fresher intake and flatten the employee pyramid is visible given that ~20% of total employees are now freshers. The company intends to further increase its fresher intake from ~6k in FY22 to ~7-8k in FY23F. We believe some measures like pruning long tail of accounts, focusing on top 100 accounts (which are driving 90% of revenues) and increasing the share of annuity projects have been consistently helping MTCL improve its margins. We expect MTCL to have stable Ebitda margin of 20.8% in FY23F (vs. 20.9% in FY22).
Client metrics tracking right direction
Mindtree’s efforts to grow beyond its top client (~26% of revenues) continue to be at play. Revenues from top client increased 8.6% q-o-q in USD terms while top 2-10 clients grew by 5.1% q-o-q. MTCL added 4 clients in $20-mn revenue band in Q1.
Hike FY23-24F EPS by ~2-3%
We marginally raise our FY23-24F EPS by 2-3% to factor in better margin and also increase our TP by 3% to Rs 2,910 (set at an unchanged 20x FY24F EPS). Our target multiple is based on a 3-stage growth model discussed in our sector report. The stock is trading at ~ 20x FY24F EPS. We prefer Infosys in the large cap (INFO IN, Buy) space.