EUR 120.00 For Business Accounts Only

MOSL: MINDTREE: Strong all-round performance, valuations rich (MTCL IN, Mkt Cap USD6b, CMP INR2899, TP INR3020, 4% Upside, Neutral)

Record order book, margin stable

• MTCL reported a revenue of USD399m (up 5.5% QoQ CC) in 1QFY23, 90bp ahead of our estimate. Reported USD revenue grew 4%, driven by broad-based growth across verticals (excluding RCM, which fell 8.7% QoQ) and strong growth in its top client (up 8.6%). Deal TCV was at a record high of USD570m in 1QFY23, up 13% v/s its previous peak in 1QFY22.
• EBITDA margin rose 10bp QoQ (40bp ahead of MOSLe) in 1QFY23, despite a one-off merger-related expense of 60bp. MTCL was able to improve margin, despite lower utilization (down 190bp QoQ), employee addition of over 2.6k, and attrition up 70bp at 24.5%.
• While its RCM business was impacted by Retail project deferments, it attributed the drag to geopolitical exposure rather than a macro slowdown. Strong commentary in other verticals, deal pipeline, and deal TCV in 1Q should help it deliver a solid revenue growth in FY23, despite a moderation in the second half. We expect it to deliver 17% CAGR in USD revenue over FY22-24.
• Moreover, the company should be able to maintain a stable margin profile in FY23, despite elevated attrition and supply-side pressures, given the exceptional start to the year (21.7% comparable EBITDA margin) unlike its peers. Net additions of ~2.6k (up 7.5% QoQ) in 1QFY23 remains robust, improving visibility. Good revenue growth and stable margin should help it deliver 20% PAT CAGR in INR terms over FY22-24E.
• MTCL has USD500m in cash and investments and recorded an FCF/EBITDA conversion of 61%.
• We maintain our Neutral rating on MTCL due to its fair valuations (20x FY24E P/E), and softness in Retail and constrains on management bandwidth due to its impending merger with LTI.
• We raise our FY23/FY24 EPS estimate by 6.1%/2.3% due to strong growth and margin beat. As the stock is trading at 20x FY24E EPS, we see limited upside hereafter. Our TP of INR3,020/share implies 21x FY24E EPS.