Mindtree - Operational recovery sustainable - Q4FY20 Result Review - HDFC Securities

Maintain ADD on Mindtree based on in-line 4Q rev and consistent (sustainable) recovery in profitability. While 1Q challenges galore, (1) Strongest-ever deal wins in 4Q (ramp-up timelines on track including Realogy), (2) Growth visibility in Hi-tech/CPG, and (3) Re-wiring to annuity deals are offsets. Our TP of Rs 830, implies 15x FY22E EPS (~2% EPS increase).

Top-account led growth, T2-10 stable: Mindtree posted revenue at USD 278mn, +1.9% QoQ CC led by (1) Continued strong growth in T1 account (24.8% of rev) at +8.6% QoQ, (2) Stable T2-10 accounts (22.6% of rev) posting +1.6% QoQ, and (3) Decline in Non-T10 impacted by the ongoing tail account rationalisation (active count down from 343 to 307 over the past 2 qtrs). Revenue growth was volume-led (4.1% QoQ) as the company navigated 4Q with no supply-related dent. T1 account growth outlook remains positive supported by services diversification and increased traction in collaboration tools & virtualisation.

Highest-ever deal wins: Mindtree reported its highest-ever deal win with TCV at USD 393mn (USD 1.2bn in FY20), supported by strategic annuity 5-yr deal with Realogy. Other deal wins from new logos were in Insurance (NorthAm), Travel tech and Manufacturing verticals.

Strong outlook for Hi-tech & Media vertical: Hi-tech & Media vertical (43.1% of rev) led the growth in 4Q at 5% QoQ supported by T1. Travel & Hospitality vertical (16.2% of rev) declined 1.3% QoQ. Hi-tech & Media vertical and CPG segment within Retail, CPG & Mfg vertical are expected to outperform in the near to medium-term.

Operational improvement continues: EBIT% stood at 12.5%, +179bps QoQ (adj. for 4Q forex loss of Rs 0.27bn). Operational improvement was led by better gross margin (+71bps QoQ) supported by INR depreciation and SG&A improvement supported by lower travel cost (+53bps). Operational improvement is sustainable, following strong recovery (+480bps in 3 qtrs) with continuity in tail rationalisation, optimal sub-contracting and offshore/utilisation levers.

Valuation and view: We maintain our positive view (following the recent upgrade) based on (1) Growth visibility in Hi-tech & Media and Retail, CPG, Mfg verticals (63% of rev) supported by T1 account, ramp-up of large deal (Realogy), (2) Healthy pipeline, deal wins (highest-ever in 4Q) and minimal deal deferrals, and (3) Sustainability of operational stability (stable T2-10, tail rationalisation, secular improvement in segmental profitability). Key risks include T1 account growth skew (increasing client concentration) and exposure to Travel & Hospitality (16.2% of rev). Factored marginal growth in FY21 revenue (+1.7%); valuations (17.8/14.2x FY21/22E) are supported by ~16% EPS CAGR over FY20-22E and strong cash generation (FCF yield at 6%).

Shares of MINDTREE LTD. was last trading in BSE at Rs.881.8 as compared to the previous close of Rs. 867.85. The total number of shares traded during the day was 33010 in over 1401 trades.

The stock hit an intraday high of Rs. 892.4 and intraday low of 853.7. The net turnover during the day was Rs. 29053209.

Source : Equity Bulls

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