Maintain ADD on Mindtree - Into another operating orbit - HDFC Securities

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain ADD on Mindtree, following broad-based growth (a second successive quarter of non-T1 growing ahead of T1) and a stellar 3Q operational performance (offshore + utilisation led). Margins have increased an astounding 13pp since the pre-COVID trough and management expects the >20% EBITDA to continue. Growth accelerated beyond the T1 account as deal TCV was a robust USD 312mn (9MFY21 TCV at >USD 1bn up 20%). While Travel & Hospitality vertical bounced back, it is still ~45% off the 4Q levels. The BFSI vertical performance was soft (relative to larger peers), but the narrative changes in Tech & Media vertical and CPG, Retail & Mfg with greater than mid-single-digit sequential growth. The near-term growth outlook remains positive and blends well with the favourable operational outcome of the strategic initiatives (annuity, partnerships, tail rationalisation and re-skilling focus). Our target price is Rs 1,735, valued at 20x Dec-22E EPS (13% CAGR over FY21-23E following ~70% in FY21).

3QFY21 highlights: (1) Mindtree's revenue came at USD 274mn, 5% QoQ in USD terms with T1 growth at 3.6% QoQ following -1% QoQ in 2Q and strong growth in ex-T1 business (+5.6% QoQ following +4.9% QoQ in 2Q). (2) EBITDA margin improved by +286bps QoQ to 23.1% supported by healthy revenue growth and operational efficiencies; wage hike across the board to be rolled out in 4QFY21, which will have a negative impact of -250bps on margins (offset by the absence of 3Q one-time provision). (4) Management expects EBITDA margin to be in the range 20%+, going ahead. (4) Growth was broad-based across the verticals with recovery in Travel (+13% QoQ); however, softness has been witnessed in BFSI (+0.8% QoQ).

Outlook: With healthy deal pipeline, recovery in travel vertical will support growth ahead. We have factored in USD revenue growth of -1.7/+12.9/+10.7% and EBITDA% at 20.6/20.8/20.7% for FY21/22/23E respectively. EPS CAGR of 13% over FY21-23E, >40% RoIC, >5% FCF yield support valuations (21.0/18.7x FY22/23E).

Shares of MINDTREE LTD. was last trading in BSE at Rs.1680.3 as compared to the previous close of Rs. 1660.6. The total number of shares traded during the day was 176604 in over 13549 trades.

The stock hit an intraday high of Rs. 1759.7 and intraday low of 1665.15. The net turnover during the day was Rs. 301668740.

Source : Equity Bulls

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