MOSL: MINDTREE CONSULTING (Buy)-Back in the game with 3Q beat and sanguine outlook

MindTree Consulting: Back in the game with 3Q beat and sanguine outlook

(MTCL IN, Mkt Cap USD1.6b, CMP INR623, TP INR725, 16% Upside, Buy)

• Upward growth trajectory: 3Q revenue growth of 3.8% QoQ exceeded our estimate by 130bp. Ramp-up in several engagements led to 8.3% QoQ growth in top customers, contributing 90% of incremental dollars. Continued strength in deal wins, high visibility in top accounts and a strong exit rate (expectations of continued momentum in 4Q) would ensure acceleration from 8% growth in FY18E to 12.6% in FY19E, without much of an ask (2.6% CQGR in FY19E v/s 3.1% in FY18E).
• Significant beat on profitability: EBITDA margin expanded by 350bp QoQ in 3Q v/s our estimate of +110bp QoQ, primarily led by [1] 5.8% sequential pricing growth, as projects moved from a transition phase to a steady state, [2] SGA optimization and [3] absence of one-time expenses from 2Q. PAT at INR1.4b was higher by 13.5% QoQ and beat estimate by 33%, primarily led by operational beat and one-time tax reversal of INR249m.
• Margin levers still intact: Margin uptick in 3Q was led by factors other than utilization, offshoring and an improvement in margins of acquired entities. Our change in stance on MTCL in Nov’17, apart from improved organic growth, had factored in an improvement in these factors, but they have only remained steady sequentially, and would only add to expansion already seen in 3Q. Moreover, revival of growth would only aid the effective use of levers toward profitability resurrection.