Mindtree's Q4FY18 results (Downgrade to Neutral) - Strong execution continues; valuations limit upside
Q4FY18 result highlights
- Picture perfect quarter: Revenue of US$226.2m (+5.5% qoq; +15.6% yoy) was ahead of expectation (IDFCe US$222m). Volumes grew 7.8% qoq but realisation declined impacted by higher working days. EBIT margins expanded by 150bps qoq to 13.3% (IDFCe:12.1%). Margin improvement was seen in standalone (90bps) and reduction losses in acquisitions. EPS of Rs 11 (IDFCe: Rs 9.4), +28.%/92% qoq/yoy.
- FY19 revenue and margins to be better than FY18: Mindtree(MTCL) expects both revenue growth and margins to be better than FY18 (Rev growth 8.2% YoY and EBITDA margins 13.6%). Further the growth is likely to be front loaded (1HFY19) and strong execution should inspire more confidence in the outlook. MTCL expects wage hikes in Q1FY19 to impact margins negatively (-300bps), but there could be some offsets given strong growth momentum.
- Top account traction continues, margins confidence grows: Q4 revenue performance was the highlight of the quarter. Margin expansion continued with improvement in both standalone and loss making subsidiaries. This coupled with solid revenue performance in Top account (+13% qoq) will inspire confidence on growth and margin sustenance.
Key positives: Strong volumes and margin performance
Key negatives: Slow net headcount addition
Impact on financials: FY19E-FY20E EPS revised up by 9.2%-6.5%.
Valuations & view
A quarter of solid operating performance. We like MTCL’s positioning in Digital and ability to scale large accounts (Top account run rating at US$161m annually). Despite the EPS upgrade, we think current valuations (21x/17.5x FY19E/FY20E PE) limit substantial share price upsides from these levels. We raise our USD revenue growth and margin estimates for FY19E/FY20E leading us to upgrade our EPS estimate for FY19E/FY20E by 9.1%/6.5%. We raise our Mar-19 target price to Rs880 (Rs720 earlier) set at 18x PE FY20E. Following strong share price performance and limited upside, we downgrade the stock to Neutral (from Outperformer).
Mindtree is an international information technology services and solutions group based in India. Co. specializes in e-commerce, mobility, cloud enablement, digital transformation, business intelligence, data analytics, testing, infrastructure, EAI and ERP solutions. Co. is structured into five verticals: Manufacturing; BFSI; Hitech; Travel & Transportation and Others. Co. offers services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business's, independent testing, infrastructure management services, mobility, product engineering and SAP services.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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