MOSL: MINDTREE (Neutral)-Stable quarter, but guidance of double-digit growth appears steep

​MindTree: Stable quarter, but guidance of double-digit growth appears steep

(MTCL IN, Mkt Cap USD1.2b, CMP INR442, TP INR475, 7% Upside, Neutral)

• Acquired entities fare better to drive revenues: MTCL grew its 4QFY17 revenues by 2.0% QoQ (marginally ahead of our estimate of +1%), led by growth of ~11% QoQ in Bluefin and ~5% QoQ in Magnet360. Excluding these, growth in the organic business was in line. The consequent leverage also drove 80bp QoQ expansion in EBITDA margin to 14.2% (est. of 13.4%). PAT at INR972m (-5.7% QoQ) was above our estimate of INR919m, but the extent of PAT beat was cut short by higher forex losses.
  
• Guidance healthy, but a tall order: MTCL guided for low-double-digit growth in FY18, which implies a CQGR of 3.3% (110bp residual impact from cross currency in FY18) for it to be met. It also expects margins to expand YoY, excluding the impact from currency movements. We are modeling flattish margins next year factoring in the impact from INR, and CC revenue growth of 9%, which implies USD revenue growth of 7.9% and a 2.6% CQGR. In addition to an uncertain macro, our cautious stance is led by severe realization challenges - MTCL's offshore realization has dropped 11% from 4QFY15 to 4QFY17.
  
• Margin caution drives our FY18 earnings cut: We have revised downward our FY18E/FY19E EPS by 11%/6%, which is mainly from a lower margin estimate in FY18 (50bp lower, ~5% impact) and a stronger INR for both FY18 and FY19. We now model EBITDA margin of 13.6% in FY18 and 14.1% in FY19, compared to 13.7% in FY17.