MOSL: MINDTREE (Buy)-Revenue beat despite BFSI weakness-Upgrading our estimates on all-round traction

MindTree: Revenue beat despite BFSI weakness; Upgrading our estimates on all-round traction

(MTCL IN, Mkt Cap USD2.2b, INR866, TP INR1000, 15% Upside, Buy)

Strong exit to an overall subdued year

• In FY18, MTCL's revenue grew by 8.6% YoY to USD847m, EBITDA by 3.1% YoY to INR7.4b and PAT by 29% YoY to INR5,701m. Excluding the one-offs from the reversal of acquisition liabilities, PAT grew 19.6% YoY to INR5,007m.
• However, the exit to the year was far healthier on the operational front, with USD revenue up 15.6% YoY to USD226m, EBITDA up 26% YoY and PAT up 87% YoY to INR1,822m. QoQ revenue grew 5.5% v/s our estimate of 4.3%. EBITDA margin expanded 100bp QoQ to 16.1%, largely in line with our estimate of 15.9%.

Brought base traction and cost levers drive earnings upgrade

Our FY19/20 earnings estimates are up 4.4/10.5%, despite lower other income and a higher tax rate, for two reasons:

• Strong revenue momentum, which drives ~50% of this upgrade. MTCL recorded 4.5% QoQ CC growth this quarter, despite a 4% QoQ decline in BFSI revenues, thanks to other verticals growing sharply by 8.5-9.7% QoQ. BFSI is expected to join the party from 1QFY19, given visibility lent from deals, driving 2.8/4.8% FY19/20E revenue estimate upgrade.
• Levers to cost are in place as well. Sub-contractor expenses were 7.5% of revenues in 4Q v/s 6.3% in FY18. Normalization of the same to lower the annual rate will compound profitability push from revenue growth and a further improvement in acquisition margins. This drives our EBITDA margin estimate higher by 70-90bp.