Edelweiss Securities maintains ‘buy’ on Mindtree with target price of Rs 2,044

By Edelweiss Securities

Mindtree’s Q2FY21 revenue grew 3.1% QoQ (2% in CC) to $261million, but came lower than our $268-million estimate. However, margin at 19.6% surpassed our 18.4% estimate. Top client Microsoft was up >35% YoY, but flat QoQ. Order book at $303 million was also flat YoY.

Key negative was a slight miss on revenue and order book. Robust margin and management’s assurance of sustaining the same going ahead was the key positive. We believe we are in a technology up-cycle; while results of all companies may not reflect this at the same time, it will reflect over a period of time. Maintain ‘buy’ with target price of Rs 2,044 (35x FY22E).

Mindtree’s revenue growth of 3%/2% QoQ in USD/CC terms was 2% lower than our estimates. We also believe that Microsoft’s flat QoQ growth (up >35% YoY) was unexciting given traction in its offerings, although management highlighted large deal lumpiness in the previous quarter. Overall TCV of $ 303 million was unexciting as well compared to $307 million in Q2FY20. Revenue growth was led by retail (up 7.6% QoQ), BFSI (up 3.6%) and travel (up 5.6%); however, the fastest-growing hi-tech vertical was surprisingly flat QoQ.

The company generated free cash flow of Rs 4.3 billion, taking total to above Rs 10 billion for H1FY21 alone, which is robust. Mindtree also announced wage hikes from January 1, 2021. We are positively surprised by strong margin expansion of 140bps QoQ and 660bps YoY. Moreover, the management’s reassurance of maintaining the same, despite wage hikes, implies substantial structural reset of margin level, akin to large caps.

Bigger wave, bigger drivers and potent catalysts: We strongly believe that the current technology wave is one of the strongest compared to the past (IMS 2009-16) wave and should benefit all players, may be with a few quarters’ lag.

The current cycle is a technology enabler and margin accretive, and should enable companies to post mid-teens revenue growth and strong earnings growth for a longer period.

Results of IT companies declared until now indicate sharp recovery in demand and margins. Mindtree should benefit immensely from its high exposure to hi-tech, though sharp run-up in the stock could lead to softness in the short-term. The stock currently trades at 24.4x FY22E. We maintain ‘buy/so’ with TP of Rs 2,044.