Mindtree Q2FY23 review: Consistently strong numbers; merger with LTI in last leg

What's Buzzing 

Mindtree reported a seventh consecutive quarter of more than 5% revenue growth in constant currency and eighth consecutive quarter of more than 20% EBITDA margin. 

Context 

The company reported constant currency growth of 7.2% QoQ. Dollar revenue grew 5.7% QoQ to US$422.1 million (mn). In rupee terms, revenue grew 8.9% QoQ to Rs 3,400 crore. In terms of geographies, the growth in revenues was led by North America (78% of mix), which grew 7.5% QoQ that more or less covered de-growth in Continental Europe market to the tune of 9.1% QoQ. UK market (6.6% mix) and APAC regions (8.5% mix) grew 3.2% and 5% QoQ, respectively. Vertical wise, growth was driven by technology, media & services (43% mix), which was up 4.3% QoQ and BFSI (19.4% mix) was up 10.2% QoQ. Travel & hospitality (15.9% mix) also reported strong growth of 8.8% QoQ while RCM, as expected, reported a decline of 0.8% QoQ (ex-currency impact, RCM was up 2.9% QoQ). EBITDA grew 6.9% QoQ to Rs 696.7 crore while EBITDA margins declined sequentially by ~60 bps to 20.5%. Reported margins were at 21% (adjusted for forex losses), which were down 10 bps QoQ. Headwinds for EBITDA margins were i) -240 bps wage hike for the quarter, which was mitigated by following tailwinds i) +110 bps impact of merger related costs, which was already factored in Q1 ii) +50 bps currency benefits iii) + 70 bps operating efficiency. TCV continue to be strong at >US$500 mn. LTM attrition is down 40 bps QoQ. The company indicated that merger with LTI is in final stages of regulatory approval and is likely to conclude at the end of CY22. 

Our Perspective

Client tech spending was earlier being done on revenue maximisation programs. Now, due to high inflation scenario, client tech spends are also being done on cost optimisation programs and the company has been playing on both sides of demand. Its TCV continues to be healthy and second consecutive quarter of US$500 mn+ was heartening. Muted net hiring could be on account of furlough impact in Q3 and Q4 ahead. BFSI vertical strong growth in the last few quarters could be attributed to transformation journey it had started a couple of years back wherein it did some business restructuring as well as invested in talent specially into client facing role, which is bearing fruit now. Travel vertical has been growing consistently due to client spending on contract less on-boarding, automation and cloud transformation. LTM attrition has started moderating and the company expects a similar trend, going forward. The company continues to maintain 20%+ EBITDA margin guidance. We estimate 19.6%, 19.9%, 16.8% revenue, EBITDA, PAT CAGR, respectively, in FY22-25E.