MOSL: MINDTREE (Buy)-Revenue miss-cautious macro commentary in contrast to current sector mood

MINDTREE: Revenue miss; cautious macro commentary in contrast to current sector mood

(MTCL IN, Mkt Cap USD2.2b, CMP INR979, TP INR1125, 15% Upside, Buy)

• Negative revenue surprise: MTCL's 2QFY19 constant currency (CC) revenue growth of 2.4% QoQ was below our estimate of +5.7% QoQ and significantly below +8.2% QoQ CC in 1QFY19. Our estimate was based on management's guidance of 'slightly lower' growth in 2Q compared to USD revenue growth in 1Q, but project completion in Retail in Europe and spill-over of replenishing deals into 3Q dragged the performance. EBITDA margin expanded 130bp QoQ to 15.4%, in line our estimate of 15.5%. PAT of INR2,063m grew 30% QoQ, lower than our estimate of +42% QoQ, primarily because of the revenue miss and lower forex gains.
• Cautious on macro outlook: MTCL expects growth in 3QFY19 to be comparable to 2QFY19, which is not very different from our earlier expectation of +2.0% QoQ CC. However, disconcerting was the commentary around customer sentiment. Given the uncertainty around Brexit, customers are seen engaging in short-term extensions to existing contracts rather than longer-term programs.
• BFS portfolio yet to fully partake in Digital: For some quarters now, MTCL has not seen as much spending on Digital within its BFS portfolio relative to other verticals. Spending programs are of the nature of run-the-business (RTB). Pipeline in BFSI also continues to be skewed toward RTB. Travel, on the other hand, is thriving on MTCL's domain knowledge in airlines and hospitality.