Mindtree's Q3FY18 results (Outperformer) - Rev beat with faster than expected margin recovery

Q3FY18 result highlights

• Beat on revenues and margins: Revenue of US$214.3m (+3.9 qoq; +11.5% yoy) was ahead of expectation (IDFCe US$209m). Volume de-grew 1.9% qoq but blended realization improved of 5.9% qoq. EBIT margins expanded by 385bps qoq to 12% (IDFCe:9.3%) despite FX headwinds. Margin improvement was seen in standalone and losses were lower in acquisitions. EPS of Rs8.6 (IDFCe: Rs6.6), +16%/40% qoq/yoy, was helped by tax reversal of Rs249m.
• Confidence in revenue guidance should grow: Mindtree’s revenue growth guidance of high-single digit revenue growth for FY18 is retained and management is indicating similar growth momentum in Q4FY18. Despite seasonal headwinds strong delivery in Q3 should inspire more confidence in the outlook. Deal signings in digital were better at US$132m vs. US$103m in Q3FY17.
• Top-10 account traction continues, margins sustainable: Q3 operating margin performance was the highlight of the quarter with improvement in both standalone and loss making subsidiaries. This coupled with solid revenue performance in Top-10 accounts (+8.4% qoq) will inspire confidence on growth and margin sustenance.

Key positives: Strong top-10 account and margin performance

Key negatives: Soft volume performance

Impact on financials: FY18 EPS revised by 8%. FY19E-FY20E EPS revised up by 11.6%-9.5%.

Valuations & view

A quarter of solid operating performance with hefty margin beat. We maintain our constructive view on MTCL, as we like their positioning in Digital, ability to scale large accounts (Top account run rating at US$142m annually) and effort towards margin recovery are bearing fruit. This coupled with 22% EPS CAGR over next two years, will support valuations (16x FY19E). We raise our margin estimates for FY19E/FY20E by 190bps /180bps to 12.8%/13.9% leading us to upgrade our EPS estimate for FY19E/FY20E by 11.6%/9.5%. Reiterate our Outperformer rating with revised March 2019 target price of Rs720 (set at 15.5x FY20E PE) from Rs650.