MindTree Ltd (MINLIM)
CMP: | 1000 Target: | 1160 (16%) Target Period: 12 months BUY
July 15, 2020 Robust deal wins; improved margin performance… MindTree reported 9.0% QoQ dip in dollar revenues, mainly led by 54.5% dip in travel & hospitality revenues. However, cost efficiency, rupee
depreciation led margins to improve by 108 bps QoQ to 16.9%. In addition, Mindtree has registered healthy deal pipeline, which increased 20.7% YoY.
Particulars Improvement in annuity business to provide revenue visibility P articular Am ount The travel vertical was impacted in the quarter as projects have come to a Market Capitaliz ation (| Crore) 16,418.9
grinding halt and were put on hold. The company expects some traction in Total Debt (| Crore) 0.5 Update Result Cash and Investments (| Crore) 939.8 the travel vertical but a full recovery will take at least a year. Mindtree’s Hi E V (| Crore) 15,479.6 tech and CPG are expected to do well in the long run mainly due to strong 52 week H/L 1062/ 652 growth in the top client. In addition, the company has a strong deal pipeline, E quity capital 164.2 which will drive revenues in coming quarters. This, coupled with traction in F ace value | 10
digital technologies may drive an improvement in revenues post this pandemic impact. Further, a few strategic things that MindTree is aiming at Key Highlights is transitioning the company from project based to more annuity base, Expect gradual improvement in which will give it flexibility in utilisation and pricing. As a result, MindTree is revenues in coming quarters. Digital focusing more on fixed price projects and cutting down tail projects. The revenues, deal ramp ups, annuity results are also visible in terms of the company winning multi-year deals revenues remain key long-term with higher annuity component. The company is also focusing on client drivers
mining and scaling up existing clients to US$50 million. This gives us comfort on the long term growth trajectory in revenues. Mindtree expects FY21E margins to be better than FY20E mainly due to Margins to be on growth trajectory low base. The company aims to have 17-18% margin band in long run A key highlight in the quarter was the company’s ability to clock margins of ~17% through operational efficiency and rupee depreciation. Mindtree Revise our EPS and multiple upwards expects FY21E margins to be better than FY20. Considering the strong and upgrade from HOLD to BUY with Q1FY21E performance coupled with cost efficiency & improvement in revised target price of | 1160/share revenues, we expect the company to post 17.1% margins in FY21E from
13.7% in FY20 with a 90 bps further improvement in FY22E. Research Analyst
Retail Equity Research Equity Retail
Devang Bhatt – Valuation & Outlook [email protected]
We believe the company’s strategy to increase the annuity business will provide long term visibility to revenues. In addition, Mindtree’s aim to improve margins via employee pyramid, offshoring, pricing, utilisation and annuity business bodes well for profit growth. Further, the company has changed the forex hedging strategy to a three year period, which will provide better PAT margin visibility. Based on these factors, we revise our Securities ICICI EPS and multiple upwards and upgrade the stock from HOLD to BUY with a revised target price of | 1160/share (19x FY22E).
Key Financial Summary s Key Financials F Y18 F Y19 F Y20 F Y21E F Y22E CAGR (FY20-22E) Net S ales 5,463 7,022 7,764 7,719 8,425 4.2% E B ITDA 741 1,065 1,062 1,320 1,517 19.5% E B ITDA Margins (% ) 13.6 15.2 13.7 17.1 18.0 Net P rofit 570 754 631 832 983 24.8% E P S (|) 34.3 45.9 38.3 50.5 59.7 P/E 29.2 21.8 26.1 19.8 16.8 R oNW (% ) 20.8 22.8 20.0 22.5 23.1 R oC E (% ) 24.9 29.8 23.0 26.1 27.2
Source: Company, ICICI Direct Research Result Update | MindTree Ltd ICICI Direct Research
Exhibit 1: Variance Analysis Q1FY21 Q1FY21E Q1FY20 YoY (%) Q4FY20 QoQ (%) Comments Revenues increased 9.0% QoQ in dollar terms, Revenue 1,908.8 1,952.0 1,834.2 4.1 2,050.5 -6.9 mainly due to adverse impact of Covid-19 pandemic on the company's travel vertical Employee expenses 1,277.6 1,290.3 1,253.2 1.9 1,293.3 -1.2
Gross Margin 631.2 661.7 581.0 8.6 757.2 -16.6 Gross margin (%) 33.1 33.9 31.7 139 bps 36.9 -386 bps SG&A expenses 309.2 335.7 396.9 -22.1 433.5 -28.7
EBITDA 322.0 326.0 184.1 74.9 323.7 -0.5 Margins improved led by operational efficiency (30 EBITDA Margin (%) 16.9 16.7 10.0 683 bps 15.8 108 bps bps), currency (90 bps) offset by visa cost (90 bps) and Covid-19 relief Depreciation 59.7 62.8 66.9 -10.8 67.9 -12.1 EBIT 262.3 263.2 117.2 123.8 255.8 2.5 EBIT Margin (%) 13.7 13.5 6.4 735 bps 12.5 127 bps Other income 40.6 18.0 22.0 84.5 18.3 121.9 PBT 302.9 281.1 139.2 117.6 274.1 10.5 Tax paid 72.7 61.6 35.4 105.4 72.5 0.3 PAT came in above our estimates on the back of PAT 213.0 206.3 92.7 129.8 206.2 3.3 better performance at operating level and higher-than- expected other income
Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY21E FY22E Comments (| Crore) Old New % Change Old New % Change We revise our revenue estimates downwards to factor Revenue 7,837 7,719 -1.5 8,546 8,425 -1.4 in TTM impact EBITDA 1,152 1,320 14.6 1,367 1,517 10.9 We revise our margin estimates upwards considering EBITDA Margin (%) 14.7 17.1 240 bps 16.0 18.0 200 bps multiple levers available to the company Upward revision in operating margins lead to increase PAT 680 832 22.4 842 983 16.7 in PAT estimates EPS (|) 41.3 50.5 22.4 51.1 59.7 16.7
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 2 Result Update | MindTree Ltd ICICI Direct Research
Conference Call Highlights
Revenue outlook: The company’s travel vertical was impacted the most in the quarter (a decline of 54.5% QoQ). Mindtree expects a marginal improvement in the travel vertical as the company is seeing some deals coming back. However, a full recovery in the travel vertical is expected in Q1FY22E. In addition, the company expects BFSI to have lower discretionary spend in the near term. However, Mindtree’s growth is driven by top client in hi tech and media vertical, which, we believe, will continue to do well and drive its revenues. This top client has higher exposure to digital technology. Hence, it is a key long-term driver. The company is also expecting better growth from a consumer goods company. The company’s deal wins are also stable at US$391 million (up 21% YoY). We believe deals could see a ramp up in H2FY21E. Mindtree is also planning to increase annuity revenue in the long run, which could be a long term driver Margin walkthrough: A key highlight of the quarter was margin of 16.9%, which was due to cost rationalisation and rupee depreciation. We believe there is still possibility of a margin improvement as the current quarter had 90 bps visa cost. The company expects margins in FY21E to be better than FY21E due to a low base. In the long run, the company aims to be in the 17-18% band. We expect margins to improve in FY22E led by an improved revenue trajectory and cost efficiency measures
Other highlights: In the Top 10 clients, the company has exposure to the travel vertical. DSO days increased by one to 67 days. We believe they can be higher in the near term. Mindtree will do optimal capex to conserve cash. There was a change in reporting hi tech media to communication, media and technology.
Order book: The order book increased 20.7% YoY to US$391 million wherein TCV from new was flat YoY (despite Covid impact) and from renewals increased 27% YoY. The company has not reported digital order book in the quarter
Clientele details: Top customer contribution to overall revenues was at 30.1% in the quarter and witnessed growth of 10.4% QoQ. Top 6- 10 customers declined 12.9% QoQ while top 2-5 customers de-grew 11.1% QoQ. The company has cut some of its tail clients. This has led to a dip in overall clients from 307 to 292
Employee update: With a net reduction of 36 in Q1, employee strength was at 21,955. Utilisation (ex-trainees) declined 140 bps QoQ to 77.4% due to low base in the last quarter
ICICI Securities | Retail Research 3 Result Update | MindTree Ltd ICICI Direct Research
Key Metrics
Exhibit 3: Geography wise break-up ES Q 4F Y19 Q 1F Y20 Q 2F Y20 Q 3F Y20 Q 4F Y20 Q 1F Y21 Revenue by geography (%) US 73.6 73.7 73.7 74.6 76.8 79.0 E urope 18.5 17.8 17.6 17.0 15.3 13.1 India 3.7 4.1 4.2 4.0 3.9 4.1 R oW 4.2 4.4 4.5 4.4 4.0 3.8 Decline in revenues was across geographies with Europe leading (down 22.1% QoQ) followed by US Growth QoQ (%) (down 6.4% QoQ) US 4.5 1.0 2.6 2.8 4.1 -6.4 E urope 3.1 -3.0 1.4 -1.9 -9.0 -22.1 India 7.1 11.7 5.1 -3.3 -1.4 -4.4 R oW 4.2 5.6 4.9 -0.7 -8.0 -13.6
Source: Company, ICICI Direct Research
Exhibit 4: Industry wise break-up Q 4F Y19 Q 1F Y20 Q 2F Y20 Q 3F Y20 Q 4F Y20 Q 1F Y21 Revenue by verticals (%) Communication Media & Technology 39.6 39.4 39.8 41.5 43.1 51.0 BFSI 21.8 21.6 21.6 21.3 20.4 20.3 Retail, CPG & Mfg 22.2 22.2 21.7 20.6 20.3 20.6 Travel & Hospitality 16.4 16.8 16.9 16.6 16.2 8.1
Communication Media & Technology drove growth, Growth QoQ (%) Travel and retail to remain a drag in the near term Technology, Media & services 4.7 0.3 3.6 5.9 5.1 7.6 BFSI 4.7 -0.1 2.6 0.1 -3.1 -9.5 Retail, CPG & Mfg 3.7 0.8 0.3 -3.6 -0.3 -7.7 Travel & Hospitality 2.3 3.3 3.2 -0.3 -1.3 -54.5
Source: Company, ICICI Direct Research
Exhibit 5: Service offerings break up Q 1F Y20 Q 4F Y20 Q 1F Y21 Q oQ YoY Revenue by service offerings (%) Interactive 23.9 22.3 20.9 -14.8 -16.2 Data Science and E ngineering services 10.5 12.4 11.8 -13.5 7.7 Cloud Services 3.3 3.8 4.3 2.9 24.9 Digital declined in this quarter both QoQ, YoY O thers 0.3 0 0 NM -100.0 Total Digtal 38.0 38.5 37.0 -12.6 -6.7 Test E ngineering 18.2 18.2 15.5 -22.5 -18.4 Package Solutions 7.4 6 5.5 -16.6 -28.8 Infrastructure Management & Tech 23.8 25.8 28.7 1.2 15.6 S upport ADM and Product E ngineering 12.6 11.5 13.3 5.2 1.2
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 4 Result Update | MindTree Ltd ICICI Direct Research
Exhibit 6: Client & human resource matrix Q 4F Y19 Q 1F Y20 Q 2F Y20 Q 3F Y20 Q 4F Y20 Q 1F Y21 Client metrics $1 mn Clients 120 122 130 134 134 127 The company’s utilisation dipped to 77.4 from 78.8 $10 mn Clients 23 23 21 22 23 23 in Q4FY20 $25 mn Clients 4 4 4 5 5 5 $50 mn Clients 1 1 1 1 1 1 $100 mn Clients 1 1 1 1 1 1
Headcount, Utilization & Attrition
Total E mployees 20204 20935 21267 21561 21991 21955 Utilization (E xcluding trainees) 77.1 77.9 79.0 78.0 78.8 77.4
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 5 Result Update | MindTree Ltd ICICI Direct Research
Financial story in charts
Exhibit 7: Dollar revenues to increase 6.6% over FY19-22E
1139 1200 1089 50 1001 1043 847 40 900 715 780 20.7 30 22.5
600 18.3 % 15.8 20 9.0 8.6 19.5 9.4 242 246 252 17.4262 264 271 275 278 253 9.1 300 $ million 9.4 10.0 6.3 8.7 10
0 0
FY16 FY17 FY18 FY19 FY20
FY21E FY22E
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21E Dollar revenue Growth, YoY Source: Company, ICICI Direct Research
Exhibit 8: Revise EBITDA margin estimates
19 17.6 18.0 16.9 17.1 15.4 15.9 15.6 15.8 16 15.2 15.2 13.6 14.1 13.7 13.5 13.0
13 % 10.0 10
7
FY16 FY17 FY20 FY18 FY19
FY22E FY21E
Q2FY19 Q3FY19 Q1FY20 Q4FY20 Q1FY19 Q4FY19 Q2FY20 Q3FY20 Q1FY21E EBITDA margin
Source: Company, ICICI Direct Research
Exhibit 9: Three year chart
15,000 1,500 13,000 1,000 11,000 9,000 500 7,000
5,000 0
Jun-17 Jun-18 Jun-19 Jun-20
Sep-17 Sep-18 Sep-19
Dec-17 Dec-18 Dec-19
Mar-17 Mar-18 Mar-19 Mar-20
Nifty (L.H.S) Price (R.H.S)
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 6 Result Update | MindTree Ltd ICICI Direct Research
Financial summary
Exhibit 10: Profit and loss statement | crore Exhibit 11: Cash flow statement | crore F Y19 F Y20 F Y21E F Y22E F Y19 F Y20 F Y21E F Y22E Total Revenues 7,022 7,764 7,719 8,425 Net profit before Tax 987 829 1,089 1,286 G rowth (% ) 28.5 10.6 (0.6) 9.1 Depreciation 164 275 255 278 COGS 4,421 5,065 5,110 5,308 (inc)/dec in Current Assets (366) (135) (347) (143) Other Expenses 1,536 1,637 1,289 1,601 (inc)/dec in current Liabilities 130 177 (34) 49 EBITDA 1,065 1,062 1,320 1,517 C F from operations 630 825 601 1,039 G rowth (% ) 43.8 (0.2) 24.3 14.9 Other Investments (23) 99 78 103 Depreciation 164 275 255 278 (Purchase)/Sale of Fixed Assets (171) (122) (309) (337) Other Income 89 95 78 103 CF from investing Activities (193) (23) (231) (234) Interest paid 3 53 54 55 Inc / (Dec) in E quity Capital 0 (49) - - PBT before E xceptional Items 987 829 1,089 1,286 Inc / (Dec) in sec.loan Funds (300) (1) - - PBT 987 829 1,089 1,286 Dividend & Dividend tax (218) (594) (283) (442) G rowth (% ) 32.9 (16.0) 31.4 18.1 Interest Paid on Loans (4) (53) (54) (55) Total Tax 233 198 257 304 CF from Financial Activities (522) (696) (337) (497) PAT before MI 754 631 832 983 Cash generating during the year (72) 135 33 308 Minority Int & Pft. from associate - - - - Opening cash balance 329 256 391 424 PAT 754 631 832 983 E xchange rate differences 13 29 - - EPS - diluted 45.9 38.3 50.5 59.7 Closing cash 256 587 620 928
EPS (Growth % ) 34.0 (16.6) 31.9 18.1 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research
Exhibit 12: Balance sheet | crore Exhibit 13: Key ratios | crore F Y19 F Y20 F Y21E F Y22E (Year-end March) F Y19 F Y20 F Y21E F Y22E E quity 164 165 165 165 Per share data (|) Reserves & Surplus 3,142 2,992 3,541 4,082 Adjusted E PS (Diluted) 45.9 38.3 50.5 59.7 Networth 3,307 3,157 3,706 4,247 BV per share 201.4 191.7 225.0 257.8 Minority Interest - - - - DPS 27.0 13.0 17.2 26.9 Total Debt 1 - - - Cash per Share 15.6 35.6 37.7 56.3 O ther long term liabilities 17 676 676 676 Operating Ratios EBITDA Margin (% ) 15.2 13.7 17.1 18.0 S ource of funds 3,324 3,833 4,382 4,923 PBT Margin (% ) 14.1 10.7 14.1 15.3 PAT Margin (% ) 10.7 8.1 10.8 11.7 Net B lock 376 860 914 973 Debtor days 69 68 76 68 C WIP 30 14 14 14 Creditor days 11 12 12 12 Other intangible assets&Goodwill 591 549 549 549 Return Ratios (%) Other long term assets 415 479 559 639 R oE 22.8 20.0 22.5 23.1 Current investments 684 694 694 694 R oC E 29.8 23.0 26.1 27.2 Debtors 1,336 1,439 1,606 1,577 R oIC 38.2 31.0 34.9 37.7 Cash & Cash equivalents 256 587 620 928 Valuation Ratios (x) Loans and advances 12 10 10 17 P/E 21.8 26.1 19.8 16.8 Other Current Assets(OCA) 480 525 705 870 EV / EBITDA 14.5 14.2 11.4 9.8 Trade payables 213 259 254 277 Price to Book Value 5.0 5.2 4.4 3.9 O ther Current liabilities 502 893 896 935 EV / Net Sales 2.2 1.9 2.0 1.8 P rovisions 140 172 139 126 Market Cap / Sales 2.3 2.1 2.1 1.9 Solvency Ratios Application of funds 3,324 3,833 4,382 4,923 Debt/EBITDA 0.0 - - -
Source: Company, ICICI Direct Research Debt / E quity 0.0 - - - Current Ratio 2.1 1.5 1.8 1.8 Quick Ratio 2.1 1.5 1.8 1.8
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 7 Result Update | MindTree Ltd ICICI Direct Research
Exhibit 14: ICICI Direct coverage universe (IT) EP S (|) P /E (x) RoCE (%) RoE (%)
Com pany Cm p (|) TP (|) Rating Mcap (| Cr) F Y20 F Y21E F Y22E F Y21 F Y22 F Y20 F Y20 F Y21 F Y22 F Y20 F Y21E F Y22E E E E E HCL Tech (HCLTEC) 603 585 B uy 1,54,290 40.8 39.1 43.5 14 15 13 23.0 19.8 19.5 21.6 17.8 17.0 Infosys (INFTE C) 806 750 B uy 3,29,025 38.9 39.5 44.9 19 19 17 30.8 29.0 30.2 25.2 23.6 24.4 TC S (TC S ) 2,196 2,400 Hold 8,20,125 86.2 83.6 94.4 25 26 23 43.5 42.4 49.1 37.5 36.7 42.8 Tech M (TECMAH) 622 630 B uy 50,432 44.8 33.7 44.3 13 17 13 19.1 13.2 15.9 18.5 12.8 15.3 Wipro (WIPRO) 247 300 B uy 1,48,751 16.6 16.9 18.9 15 15 13 19.3 17.7 18.4 17.4 15.8 16.4 Mindtree (MINCON) 1,000 1,160 B uy 16,419 38.3 50.5 59.7 26 20 17 20.0 22.5 23.1 23.0 26.1 27.2 LTI (LTINFC) 2,290 2,050 B uy 34,130 86.6 95.0 110.4 23 21 18 30.7 29.0 28.7 28.1 25.9 25.3 NIIT Tech (NIITE C) 1,595 1,330 Hold 8,561 71.4 75.5 88.6 20 19 16 24.2 24.7 25.6 19.4 20.0 20.7 Infoedge (INFE DG) 2,965 3,290 Hold 33,948 26.8 21.6 33.8 166 129 82 18.0 13.6 19.1 13.5 10.1 14.3 Teamlease (TEASER) 1,868 2,000 B uy 2,855 20.5 38.9 61.5 81 43 27 15.0 11.3 14.6 6.8 10.4 14.2
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 8 Result Update | MindTree Ltd ICICI Direct Research
RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%
Pankaj Pandey Head – Research [email protected]
ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]
ICICI Securities | Retail Research 9 Result Update | MindTree Ltd ICICI Direct Research
ANALYST CERTIFICATION
I/We, Devang Bhatt, PGDBM, Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
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ICICI Securities | Retail Research 10