MOSL: MINDTREE (Buy)-Top accounts continue driving turnaround

MindTree: Top accounts continue driving turnaround

(MTCL IN, Mkt Cap USD2.5b, CMP INR1063, TP INR1225, 15% Upside, Buy)

• Near-complete turnaround in four quarters: MTCL's sharp turnaround of business looked complete, with strong revenue momentum driving USD revenue growth of 20.7% YoY compared to +0.6% four quarters back. 1QFY19 revenue of USD242m was ahead of our estimate of USD235m, and grew as much as 8.2% QoQ CC. EBITDA margin contracted 200bp QoQ to 14.1%, slightly below our estimate of +14.5%. However, excluding USD1.5m endowment toward the Stanford University, EBITDA margin would be 60bp higher (at 14.7%). PAT declined 7% QoQ to INR1,582m, 4% below our estimate, primarily because of lower other income.
• Top customer continues driving traction: As has been the trend over the past few years, the top customer contributed 43% of incremental revenue during the quarter, and now accounts for 19.4% of revenues. YoY growth in the account is 53%. The change in momentum has been in other accounts, which grew 15% YoY in 1QFY19 v/s -3% in 4QFY17. During the quarter, the top 2-20 accounts for MTCL grew by 5.2% QoQ.
• Momentum intact: Dollar revenue growth in 2Q is expected to marginally lag growth of 1Q (+6.8% QoQ) - even 5% QoQ growth in 2Q would translate into 23% YoY growth. The consequent 1HFY19 USD revenue growth of 22% is the key factor behind our 5/7% revenue/earnings upgrade post 1QFY19.