Event update: Mindtree (Neutral); Analyst meet takeaways – Higher growth higher margins

We attended the analyst meet of Mindtree (MTCL) wherein management reiterated their growth strategy. The strategy centres around building capabilities in digital and accelerating share gains from large deals. This should translate in higher than industry growth with expanding margins. We have liked MTCL strong digital positioning and premium growth. However we believe that valuations of 20.7x FY20E P/E capture lot of the premium execution, thus limiting share price upsides. Retain Neutral.

Market Outlook: MTCL expects IT spending to grow at 6% YoY, however digital and cloud centric technology spends are expected to grow at 16% and 21% YoY respectively. MTCL strategy is positioning its investments around three areas 1)Cloud > through partnerships , 2) Continuous delivery > through automation and 3) Personalisation/UX > through consulting.

Mile markers for MTCL: MTCL expects to maintain its industry leading growth and maintained that it will continue to grow faster than the industry. Further management is focussed on improving its large deal wins, and this is a key monitorable in order for them to scale further and gain customer wallet share. Additionally, management expects that focus on margin improvement will continue and expects margins to improve through this journey.

 Margin outlook positive: While MTCL has been delivering strong growth, we note that margin delivery has been mixed. Management reiterated their intent to drive margin improvement led by cost initiatives, better growth in addition to a supportive INR. MTCL expects EPS growth to exceed revenue growth and with scale one should expect SG&A leverage apart from non-linear revenue growth.

Valuations and View

Overall MTCL was positive on the growth prospects and has been making investments in the areas of growth. We adjust our estimates for higher USD/INR and increase our margin estimates which lead us to upgrade our FY19E/FY20E EPS by 1.5%/3.9%. We maintain that MTCL has been executing well but valuations at 20.7x FY20E P/E are expensive. Based on the EPS upgrade we raise our TP from Rs950 to Rs1075 (set at 20x FY20E). Maintain Neutral.