Mindtree - Q4FY18 Results Update - Excellent Operating Performance Continues

Mindtree has posted a healthy performance in 4QFY18. Its revenue grew by an impressive 5.6% QoQ (4.5% in CC terms) to US$226.2mn (exceeding our estimate by 1.4%) led by superb show in key verticals i.e. Travel & Hospitality (+9.9% QoQ), Technology, Media & Services (+9.3% QoQ) and MFG, Retail & CPG (+6.4% QoQ) in USD terms. On the flip side, BFSI revenue declined by 3.4% QoQ, which the Management believes to be a one-off. Aided by impressive revenue growth, favourable currency movement and higher utilisation, its EBITDA margin expanded by 103bps QoQ to an 8-quarter high of 16.1%, Notably, margin growth is followed by 348bps QoQ expansion in the previous quarter, driving confidence on FY19 margin trajectory, with revenue growth being the key lever. Mindtree won its single largest contract from a US airline customer. The company won deals worth US$298mn in 4QFY18 (+42.6% YoY). The Management’s expectation of even growth along with margin expansion in FY19E vs. FY18 led by healthy revenue growth is a major positive, in our view. Good revenue visibility across all verticals, strong deal wins and high digital component drive our confidence further.

Healthy Operating Metrics All-Round

From volume and pricing perspective, its blended volumes grew by a robust 7.8% QoQ, while blended pricing declined by 1.9% QoQ. Going forward, Mindtree is stepping up usage of automation and use of tools to reduce efforts for the same volume, which is likely to lead to a sustainable improvement in pricing, especially in ‘run-the-business’ projects, where clients look for cost savings. Mindtree has started disclosing the number of BOTs in operation, which stood at 335 as of FY18-end.

Mindtree added a gross of over 1,100 employees in 4QFY18 (with net addition of 523 employees) taking total headcount to 17,723 as of FY18-end. Employee utilisation came in higher, with ex-trainee utilisation at 75.1% (vs. 74.3% in 3QFY18), while cum-trainee utilisation came in at 73.8% (vs. 72.8% in 3QFY18). Management is comfortable with the current utilisation rate.

Outlook & Valuation

Greater confidence on margin growth led by robust business momentum is the key positive for Mindtree, in our view. Further, strong order book and good revenue visibility across verticals drive our confidence on healthy growth over FY18-FY20E. Notably, the growth is expected to be evenly spread out in FY19E rather than being back-ended. Hence, we believe that strong exit rate in 4QFY18 will drive >16% USD revenue growth and >200bps expansion in EBITDA margin in FY19E.Upgrading our EPS estimates by 4%/14% for FY19E/FY20E, respectively and applying a target PE multiple of 20x FY20E EPS, we maintain our BUY recommendation on the stock with a revised TP of Rs1,000.

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