MOSL: MINDTREE CONSULTING (Downgrade to Sell)-Dragged by acquisitions, top clients and standalone margins

​MindTree Consulting: Dragged by acquisitions, top clients and standalone margins; Downgrade to Sell

(MTCL IN, Mkt Cap USD1.3b, CMP INR507, TP INR450, 13% Downside, Downgrade to Sell)

• 1Q miss reflects elevated pressures: MTCL's 1QFY18 revenue grew 1.2% QoQ CC versus our estimate of +3% QoQ, dragged by acquired companies' performance: QoQ decline of 19% in Bluefin and 13% in Magnet360 (negative impact of 1.4pp on growth). This, combined with visa costs (140bp impact) and a stronger INR (90bp), drove ~300bp EBITDA margin contraction to 11%, well below our estimate of 13.9%. Adj. PAT declined 5% QoQ to INR925m, missing our estimate of INR1,244m, led by operating miss.
• Downgrades revenue growth outlook: MTCL revised its FY18 revenue growth outlook to high-single-digits from low-double-digits earlier, following a slow start and lack of predictability in segments such as Salesforce and Bluefin. Also, it had earlier expected margin expansion in FY18 excluding the impact from a stronger INR, which will now likely happen only in the standalone segment and consolidated margins will likely be lower.
• Trend in some key metrics disconcerting: Since 2QFY16, MTCL's absolute IFRS EBIT has declined 45% from INR1,783m to INR979m, and acquisitions are only partly responsible for the trend. Likewise, since 3QFY16, revenue from the top 2-5 accounts is down 24% and that from the top 6-10 accounts is down 12%. MTCL's revenue and margin outlook does not imply a swift fix to the multitude of challenges facing the company.