Analyst Corner | Mindtree Q2 results deliver a beat on all parameters

The second quarter performance of Mindtree beat Bloomberg consensus estimates at both revenue and margin levels. Revenue at $422 million was up 7.2% sequentially in constant currency (cc) terms (vs consensus expectation of 5.5% growth) and the EBIT margin at 19.1% was down 10 bps QoQ (vs consensus expectation of 18.1%). EPS at Rs 30.8 was up 27% year-on-year.

Revenue performance strong considering weakness in retail vertical: The growth was across all verticals except for retail, which recorded a 0.7% Q-o-Q decline (in dollar terms), while BFSI had a 10.4% Q-o-Q growth in dollar terms. The total contract value (TCV) of deal wins at $518 million was up 44% YoY, with a reasonable mix of annuity and transformation deals. Mindtree noted that there could be a few pockets of weakness in certain clients impacted by ongoing macroeconomic turmoil, but at the aggregate portfolio level, it does not see any cause for concern regarding growth in the near term.

Margin performance impressive: The EBIT margin of 19.1%, down 10 bps QoQ, had a (-)240 bps headwind from salary hikes, which was offset by 110 bps from non-recurrence of one-off charges of Q1 (visa cost and merger costs), 50 bps from currency and 70 bps from operational efficiency. Continued focus on cost optimisation, pyramid rationalisation and rationalising sales efforts towards profitable accounts remain the key factors behind the stable margin for Mindtree. We expect the EBIT margin of 19.2% in FY23F.

Merger with LTI in final legs: Mindtree management noted that it is in advanced stages of regulatory approvals for its announced merger with LTI, and expects it to close by the end of December. The company has already started the integration process and expects to derive revenue synergies in the combined entity.

Rating and target price: We raise FY23-24F EPS by 2-5% to factor in better margin and also increase our target price by 5% to Rs 3,170. Our rating on the stock remains ‘neutral’. The stock is trading at ~21xFY24F EPS.