Mindtree - Subtle downgrade in outlook! - ICICI Securities

While reported revenue growth (+5.2% QoQ, USD) was largely in-line, EBIT margins (18.6%) were 90bps ahead of our estimates. Even as BFSI continued to struggle (-1.3% QoQ, USD), sharp recovery in TTH boosted growth. Beat on margins was driven by better than expected operational efficiencies. Order booking in Q4 (US$375mn) was healthy with overall TCV for FY21 increasing 12.3% YoY. Double-digit revenue growth is now indicated for FY22E. We read it as a subtle downgrade from the earlier outlook of 'industry-leading growth' (expected to be in high teens) hinted at during the previous quarter. EBITDA margin is guided to be above 20%. For midcap companies, maintaining such margins and simultaneously delivering high growth over the medium term may be a challenge. As we rebase our exchange rate assumptions (INR/USD = 75/76 for FY22E/FY23E) and correct growth / margin trajectory, our EPS estimates over FY22E-FY23E change +/- 3%. Given the recent sharp run-up in valuations (24x FY23E EPS) and limited margin of safety for disappointments (on growth and/or margins), we downgrade the stock to HOLD (from Add). Tactically, the stock may remain buoyant given: 1) Covid second wave in India, and 2) INR weakness.

- In-line revenues, beat on margins. Reported revenue growth (+5.2% QoQ, USD) was largely in line with our estimates. Barring BFSI (-1.3% QoQ, USD), growth was broad based across verticals. Softness in this vertical was attributed to slippage of a couple of project ramp-ups into the next quarter. Travel & Transportation vertical witnessed strong recovery (+17% QoQ, USD), albeit on a low base, boosting the overall reported growth. Microsoft account reported healthy growth (+3.3% QoQ).

Sequentially, EBITDA margin contracted 120bps and was 90bps ahead of our expectations. Wage hike (-240bps impact) and INR appreciation (-50bps impact) were the key margin headwinds. Operating leverage and operational efficiencies (+170bps impact) were the key margin tailwinds.

- Company now expects double-digit growth and >20% EBITDA margins. Order booking in Q4 (US$375mn) was healthy with overall TCV for FY21 increasing 12.3% YoY. Double-digit revenue growth is now indicated for FY22. We read it as a subtle downgrade from the earlier outlook of 'industry-leading growth' (expected to be in high teens) hinted at during the previous quarter. EBITDA margin is guided to be above 20%. For midcap companies, maintaining such margins and simultaneously delivering high growth over the medium term may be a challenge.

As we rebase our exchange rate assumptions (INR/USD = 75/76 for FY22E/FY23E) and correct growth / margin trajectory, our EPS estimates over FY22E-FY23E change +/- 3%. Given the recent sharp run-up in valuations (24x FY23E EPS) and limited margin of safety for disappointments (on growth and/or margins), we downgrade the stock to HOLD (from Add).

Shares of MINDTREE LTD. was last trading in BSE at Rs.2094.35 as compared to the previous close of Rs. 2067.6. The total number of shares traded during the day was 167098 in over 8584 trades.

The stock hit an intraday high of Rs. 2144.95 and intraday low of 1999.85. The net turnover during the day was Rs. 349777335.

Source : Equity Bulls

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