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MOSL: MINDTREE (Neutral)-Multiple positives except for softness in deal wins

MINDTREE: Multiple positives except for softness in deal wins

(MTCL IN, Mkt Cap USD2b, CMP INR864, TP INR985, 14% Upside, Neutral)

 

However, rich multiples leave no margin of safety

• Strong growth at top account (+26% YoY) and better-than-expected operational optimization assuage concerns about ownership and management transition. Early signs of success related to strategy refresh (e.g. increasing revenue share from fixed-price contracts) are now visible.
• As mix incrementally shifts toward annuity revenue, we see headroom for further (i) utilization improvement, (ii) pyramid correction and (iii) reduction in sales intensity. However, the impact of this should be offset by correction in higher yields(vs. peers). The recent sharp rally in the stock price and rich multiples (19x one year forward P/E) already factor in the key positives, in our view. Maintain Neutral.

 Surprise on margins, top account growth

• Revenue was up 9.4% YoY to USD275m (marginal miss). EBIT declined 2.4% YoY (our estimate: -18%) and PAT increased ~14% YoY to INR1,970m (our estimate: -3.2%).
• This was led by sharp growth acceleration at top account (26% YoY v/s 12% YoY in 2Q), despite the recent transition in account management.
• Share of revenue from fixed-price contracts increased ~280bp QoQ to ~59%, reflecting the progress on strategic re-alignment toward annuity revenue.
• Strong beat on EBIT margin was driven by better-than-expected operational optimization and projects moving from transition to steady state.
• However, both new deal wins and renewals during the quarter disappointed.