Weakness in top 2-10 client bucket a concern; positives factored in; ‘Neutral’ retained
It plans to grow this gradually, using current capabilities and has no plans for significant investments to increase its presence rapidly.
We attended Mindtree’s (MTCL’s) Analyst Day, where the management shared its new 4x4x4 strategy and opportunities in digital trends. Here are the key highlights from the meet: MTCL announced its new 4x4x4 strategy, with four industry groups, four service lines, and four geographies. While the four industry groups are in its existing areas of operations, the changes in service lines (Customer Success, Data and Intelligence, Cloud and Enterprise IT) point to an elevated focus on Digital (three out of the four service lines are in the Digital domain).
It plans to create local teams and leadership in non-US geographies (UK and Ireland, Continental Europe and Asia-Pacific and RoW) to sell industry capabilities to a wider client base. Mgmt also announced strengthening of its Consulting practice to better cross-sell its new service lines.
Healthcare a potential future addition to industry verticals: MTCL announced it is looking to expand its presence in the Healthcare vertical as it is seeing new business overlap between its core verticals of CPG, Retail and Technology into areas like Payer, Provider and Device Manufacturing. It plans to grow this gradually, using current capabilities and has no plans for significant investments to increase its presence rapidly.
New strategy would need investments: We see the new strategy of expanded regional focus and planned expansion into Healthcare as potential additions to its medium-term revenue aspiration of growing above industry growth. But increasing presence in Continental Europe and APAC would require upfront investment, which can impact near-term profitability. We would wait for further progress on new strategy before baking in any impact into our estimates.
Valuation and view Since Jul’19, after the disruption pertaining to ownership change, MTCL has been taking steps toward achieving stability in its client and employee count.
Persistent weakness in the Top 2-10 client bucket (-3.5% q-o-q, 8-quarter CQGR of -2%) is a concern. High exposure to Travel, Transport, and Hospitality is also expected to be a drag on overall recovery. The stock is currently trading at 21x FY22e EPS. We believe key positives are already captured and see limited upside. Our TP implies 22x FY22 EPS. Maintain Neutral.