Mindtree Q1FY23 review: Strong numbers barring some client specific ramp down

What’s Buzzing

The company reported its strongest ever TCV of US$570 mn. Margins improved sequentially.

Context:

The company reported 5.5% CC QoQ revenue growth (sixth consecutive quarter of 5%+ CC QoQ growth) while dollar revenues grew 4% QoQ and rupee revenues grew 7.7% QoQ. EBITDA margins came in at 21.1% QoQ, up 10 bps QoQ. EBITDA margins were as follows (headwinds were: -50 bps visa costs, -60 bps merger related costs; tailwinds were: +50 bps operating efficiency, +70 bps forex benefit). Growth was driven by technology, media & services (up 5.9% QoQ), BFSI (up 6.5% QoQ) and travel & hospitality (up 11.2% QoQ). In terms of geographies, growth in revenues was led by US (77% of mix), which grew 8.5%. The decline in retail vertical to the tune of 8.7% QoQ and UK & continental Europe by 9.2% and 18.7% was related to couple of clients. Among client, revenue growth was led by top customer, up 8.6% QoQ. The company reported highest ever order book of US$570 mn for the quarter, which was up 13% QoQ and 46% YoY while LTM attrition increased 70 bps to 24.5% now. The company received approval from BSE & NSE on merger with LTI and NCLT application was filed on June 17, 2022. The company expects final approval by Q4FY23.

Our Perspective:

The company indicated that tech spends across clients continue to be robust barring some client specific issues whose operations were impacted by Russia/Ukraine war as well as China Covid related lockdowns. TCV trend continue to be robust, which implies strong revenue growth in the coming quarters. Margin performance for Mindtree was standout among its large peers, could be because of lower employee costs on faster flattening of curve (20% employee base is fresher now) and also due to lower subcontractor cost as percentage of revenue compared to few large peers. The company maintains 20%+ EBITDA margin guidance for FY23, which implies some impact due to wage hike cycle in Q2. It added 1,500 freshers for fourth consecutive quarter and guided for 7,500 fresher additions in FY23, which indicates acceleration in fresher addition in the coming quarters. The company expects attrition to be elevated in Q2 and likely settle in H2FY23. We estimate 19.4%,16.9%, 13% revenue, EBITDA, PAT CAGR, respectively, over FY22-24E.