Mindtree stock is a buy, says Motilal Oswal; target price Rs 600

By: | Published: November 24, 2017 2:42 AM

Revenue growth at MTCL had faltered from its otherwise industry-leading trajectory, courtesy weakness in top clients exacerbating the already existent traditional pressures.

Smaller deal sizes in Digital restricted MTCL’s ability to contain headwinds despite it forming a high proportion of revenue.

Revenue growth at MTCL had faltered from its otherwise industry-leading trajectory, courtesy weakness in top clients exacerbating the already existent traditional pressures. Smaller deal sizes in Digital restricted MTCL’s ability to contain headwinds despite it forming a high proportion of revenue. With digital becoming mainstream and top clients seeing stability, we expect a revival in revenue growth momentum. At parallel, margin improvement should be a function of initiatives both at an organic and inorganic level. Following our interaction, we believe that the margin recovery could play out sooner, especially if Magnet360 and Bluefin EBITDAs revert to the black.

We see MTCL’s margins improving to 14.4 % by FY19 and potentially by another 110 bp to 15.5 % by FY20, driving 7%/8% upgrade in our earnings estimates for FY19/FY20. Such combination of growth and margin performance warrants a re-rating. Our revised price target of Rs 600 discounts forward earnings by 15x. We upgrade MTCL to Buy. The industry’s growth rate has softened, largely led by account-specific concerns across vendors. At MTCL, this has been compounded by cost pressures in traditional segments. The combination of challenges has not been completely offset by Digital, given its much lower base. Add to that the deflationary impact from Cloud and SaaS options to infrastructure and applications, respectively, and the growth environment gets tougher.

Endorsement of its capabilities by the analyst community has also played a key part. With the novelty of Digital and MTCL growing revenues mainly at onsite, the share of onsite revenues grew from 34.5 % in 4QFY12 to 60.5 % in 4QFY17. However, more and more incremental business in Digital will be carried out from offshore, as the capabilities have built up over time.
MTCL already has 80 sales plays within Digital. Over the last few years, everything — from training to sales methods — has undergone significant change. The overarching encapsulation has been of selling solutions to clients rather than technologically-qualified staff. The margins in acquired entities of Bluefin and Magnet360 suffered amid revenue volatility as a consequence of high fixed cost base from expensive consulting.

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