Mindtree's Q1FY19 results (Neutral) - Big revenue beat doesn’t flow through to margins

Q1FY19 result highlights

• Big revenue beat but margin miss: Revenue of US$241m (+6.8% qoq; +20.7% yoy) was ahead of expectation (IDFCe US$233m). Volumes grew 6.6% qoq. EBIT margins declined by 182bps qoq to 11.6% (IDFCe:12.5%). This included endowment grant of US$1.5mn to Stanford, which impacted EBIT margins by 60bps. Mindtree (MTCL) has taken enabling resolution to invest Rs1.5bn or 10% of profits into CSR and such grants. Even adjusting for this EBIT margins at 12.3% for Q1FY19 were below estimates. EPS of Rs 9.6 (IDFCe: Rs 9.9), -13%/+33% qoq/yoy.
• Commentary positive: MTCL expects both revenue growth and margins to be better than FY18 .MTCL expects margins in Q2FY19E  to be better than Q1FY19 but reported revenue growth should moderate into Q2FY19E. This is on expected lines, though margin improvement should be better.
• Top account traction continues: Q1 revenue performance was the highlight of the quarter. This was yet again led by solid revenue performance in Top account (+16% qoq). Deal wins in Digital were better at US$139mn vs. US$102mn in the previous quarter. Management indicated that Top2-20 accounts have grown 5% QoQ and they are focussing on diversifying the revenue base.

Key positives: Strong volume and revenue growth

Key negatives: Margin miss and receivable increase

Impact on financials: FY19E/FY20E EPS changed by +2.0%/-0.5%.

Valuations & view

Strong volume growth but margin performance should have been better given the extent of the revenue beat and a supportive INR. Additionally, the receivables have grown 19% QoQ to Rs12bn (Rs10.1bn in Q4FY18). Despite a topline upgrade (given Q1 beat), our EPS estimates have changed only marginally as margin estimates already build a recovery through FY20. MTCL has executed well on revenues but high expectations limit upgrades. Further we continue to think valuations (24.4x/20.7x FY19E/FY20E PE) limit substantial share price upsides from these levels. We retain our Mar-19 target price of Rs950 set at 18.5x PE FY20E. Retain Neutral.