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Mindtree - Standout performance in QoQ EBITDA margin expansion

ICICI Securities 14 Jan 2022

What’s buzzing:

Mindtree reported strong revenue growth for the quarter. However, the highlight of the quarter was margin expansion on a sequential basis, which is a divergent trend from its large size peers.

Context:

The company reported constant currency growth of 5.2% QoQ (vs. our expectations of 5%) while dollar revenue growth of 4.7%QoQ was a tad above our estimate of 4.5% QoQ. The company registered EBITDA margin of 21.5% (up 100 bps QoQ, above our estimate of 20.9%). The growth was driven by Technology, Media & Services (up 6.1% QoQ), BFSI (up 4.7% QoQ) and Travel & hospitality (up 7.0% QoQ). In terms of geographies, the growth in revenues was led by US and APAC, which was up 4.9% QoQ and 15.7% QoQ. In client profile, revenue growth was led by top client, which was up 7.2% QoQ. The company reported 100 bps QoQ EBITDA margin expansion aided by +60 bps due to revenue growth and 40 bps currency tailwinds.

Our Perspective:

The company’s growth largely came in from continued client spending in Technology, Media sector (43% of the mix) as well as continued traction in its top clients. Mindtree has been managing subcontractor costs well (9.7% of revenue in Q3 vs. 11.2% of revenue in Q1), which coupled with aggressive fresher’s hiring (the company is looking to hire 1,500 freshers per quarter for next few quarters) could explain margin expansion. We estimate revenue, EBITDA, PAT CAGR of 26.8%, 25.3%, 27.3%, respectively, CAGR in FY21-23E. The valuations continue to be rich (it is trading at 37x FY23E).

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