Mindtree's Q3FY19 results (Neutral) - High Volatility doesn’t bode well for high multiples

Q3FY19 result highlights

• Inline revenue & margins: Revenues of US$ 251.5m (+2.1% qoq; +17.4% yoy) was inline with our estimates  (IDFCe US$251.3m). MTCL posted a CC  growth of 2.4% QoQ inline with our estimate of 2.5% QoQ. The volume growth was muted at -1.1%  (-1.4% QoQ offshore and -0.1%  QoQ onshore) in Q3FY19. EBIT margins  came at   13.6% slightly came above our estimates of 13.4%. The margins were driven by operational efficiencies (+48bps qoq).  PAT at Rs1.9bn (-7.3% qoq, +35% yoy) – was below estimates of Rs2.01 bn – impacted by lower other income (loss of Rs 200mn vs. profit of Rs 524mn in Q2). Tax rate came at 13.8% due to one time benefit of Magnet 360 merger.
• Weak deal signings: Total contract value (TCV) in Q3FY19 was -5.5% QoQ, +4.9% YoY at $256mn (Q2FY19: $271mn). As compared to the strong TCV growth of Large caps, MTCL posted a weak TCV in strong demand environment. Pressure was seen in Digital TCV also at US$ 136 mn vs US$ 162mn down 16% QoQ & +3% YoY. Top account has grown just 1.1% QoQ in dollar terms in this quarter but Non-Top 10 account have posted a growth of 3.4% QoQ in dollar terms in Q3FY19.
• Weakness in BFSI vertical: BFSI de-grew by 1.1% QoQ in dollar terms  due to a client ramp down in insurance sector, Manufacturing & Retail grew by 4.7% QoQ in dollar terms, Hi- Tech & media grew by 2.3% QoQ in dollar terms, Travel & hospitality grew by 2.1% QoQ in dollar terms. Management expects BFSI sector to pick up in Q4FY19.  Digital now accounts to 49.5% (Q2FY19: 48.1%) of the total revenues. 

Key positives: Strong growth in Retail vertical, Non-top 10 account growth.

Key negatives: Weak volume growth, Weak TCV, de-growth in BFSI

Impact on financials: FY19E/FY20E/FY21E EPS cut by 0%/-1%/0%.

Valuations & view

MTCL TCV has de-grown about -5.5% in Q3FY19 which is a concern to us as Infosys & TCS has posted strong in TCV for this quarter. Top account has also grown just 1.1% in this quarter. There is a high degree of volatility in its sequential revenue growth (CC) & also in its vertical & service line. We believe all this reason will weigh on multiples for MTCL, particularly when benchmark multiple for sector (TCS) has corrected. Maintain Neutral at TP of Rs.1000 (set 18x PE of Dec-20).