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MOSL: MINDTREE (Upgrade to Buy)- Can growth too surprise?

MINDTREE: Can growth too surprise?

(MTCL IN, Mkt Cap USD2.2b, CMP INR936, TP INR1100, 18% Upside, Upgrade to Buy)

 

• Since July'19, post L&T took over control, Mindtree (MTCL) has been taking encouraging steps in its journey toward stability on both client and employee counts. Dec'19 was the first quarter that demonstrated signs of this stability. Strategy change toward higher focus on annuity revenue and tail account rationalization is already reflecting in the revenue and client mix.
• The company's competitive advantages in doing business remain robust and intact. These include (a) strong reference ability in SAP HANA/salesforce ecosystems, (b) deep domain expertise in niche verticals (e.g., Hi-Tech, CPG) and (c) long-standing partnerships with global tech majors (e.g. Microsoft, SAP).
• As evidenced in the case of LTI and LTTS, we expect L&T's backing to open up new avenues of growth/augment scale in some areas (e.g. BFSI).
• We expect industry leading revenue CAGR of ~13% over FY20-22, driven by (a) strong mining of top-30 accounts, (b) the theme of and (c) the differential client mix in BFSI and Retail.
• EBIT margin is expected to expand ~240bp, led by the shift in mix, the absence of one-off costs and the tail account rationalization initiatives.
• We value the stock at ~18x FY22E EPS. Rich parentage, industry leading earnings growth/RoCE (30%+ in steady state), better growth visibility and earnings quality are likely to defend the premium multiples, in our view. High dependence on the top account (~23% of revenue) and leadership stability are key monitorables.