Mindtree's Q2FY19 results (Neutral) - Rev and margin miss doesn’t bode well for multiples

Q2FY19 result highlights

• Revenue and margin miss: Revenue of US$ 246.4m (+2.0% qoq; +19.5% yoy) was below of our expectation (IDFCe US$250m). Mindtree (MTCL) posted a constant currency (CC)  growth of 2.4% QoQ below our estimate of 4.4% QoQ. The volume growth was strong at 6.3% QoQ (7% offshore and 3.9%  onshore QoQ) but didn’t translate into revenue growth. EBIT margins increased by 143bps qoq to 13.1% (IDFCe:14.1%). EPS of Rs 12.5 (IDFCe: Rs 12.9), -30.5%/+69% qoq/yoy.
• Mixed commentary: MTCL expects both revenue growth and margins to be better than FY18. Management expects margins in Q3FY19E to see some uptick over Q2FY19 and reported revenue growth will be inline with Q2FY19. Retail de-grew due to few projects coming to end in Europe, management mentioned that retail will pick up growth in coming quarters.
• Mixed geography performance: MTCL posted a mix geography performance with US growing by 3.3% QoQ in dollar terms, Europe de-grew by 5.1% QoQ in dollar terms & India grew by 8.6% QoQ in dollar terms. Europe faced weakness in this quarter due to some projects coming to end.

Key positives: Strong volume

Key negatives: Margin miss and receivable increase

Impact on financials: FY19E/FY20E/FY21E EPS cut by 4.3%/2.8%/2.7%.

Valuations & view

Disappointing quarter considering strong exit rates of Q1 and a weaker INR should have translated into better margin performance. Additionally, the receivables have grown again 7% QoQ to Rs12.9bn (Rs12bn in Q2FY19). We cut our EPS estimates to factor in the revenue miss. In our view, revenue and margin miss will weigh on multiples for MTCL, particularly when benchmark multiple for sector (TCS) has corrected. We reduce our Dec-19 target price of Rs1000 (Rs1160 earlier) set at 18x PE. Retain Neutral.