mindtree ltd minlim) - icici...

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Result

Update

January 15, 2020

CMP: | 886 Target: | 945 (7%) Target Period: 12 months

MindTree Ltd (MINLIM)

HOLD

Margin expansion key positive…

The company reported 1.5% QoQ growth in dollar revenues driven by its

top client. However, revenues were below our estimates while growth in 6-

10 clients continued to decline in the quarter. The key positive in the quarter

was margin expansion of 262 bps mainly led by operational efficiency and

currency benefit. Key concern in the quarter was low digital growth at 13.5%

YoY, dip in TCV (down 19.1% YoY & 32.6% QoQ) leading to book to bill ratio

of 0.76x and increase in attrition to 17.2% (vs. 13.4% in Q3FY19).

Improvement in annuity business to provide revenue visibility

Revenue growth of 1.5% QoQ was driven by 4.8% QoQ growth in realisation

(led by projects entering steady state) offset by 3.1% dip in volumes (led by

furloughs). Top customer was the prime contributor to the growth as

revenues from it grew 13.9% QoQ. On the order book front, TCV in the

quarter declined significantly and book to bill dipped to 0.76x. We believe

this may be due to delay in deal closure and may improve in subsequent

quarters. In addition, the company is strategically transitioning from project

based work to annuity based work, which will provide better revenue

visibility and consistent growth. Further, to improve revenue the company

is cutting tail end clients and focusing on mining and scaling top clients. The

company has also set up large deals team to achieve the same. We believe

these changes will take time but will provide long term visibility to revenue

growth. Hence, we expect dollar revenues to increase at 9.0% CAGR in

FY19-22E.

Margins to be on growth trajectory

The company reported healthy margin growth in the current quarter led by

pyramid rationalisation, currency benefit and stable project cost. Going

forward, margins are expected to improve QoQ driven by factors such as

employee pyramid, offshoring, pricing, utilisation and annuity business.

Hence, we expect margins to improve 16.1% in FY21E and 16.4% in FY22E.

Valuation & Outlook

We believe the company’s strategy to increase annuity business will provide

long term visibility to revenues. In addition, the company’s aim to improve

margins via employee pyramid, offshoring, pricing, utilisation and annuity

business bodes well for the 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

EPS and multiple upwards leading to a revised target price of | 945/share.

However, the recent run up in the stock prompts us to maintain HOLD rating

on the stock. Key things to watch out in coming quarters are: 1) attrition, 2)

deal TCV and 3) digital revenue growth.

Key Financial Summary

s

Key Financials FY18 FY19 FY20E FY21E FY22E CAGR (FY19-22E)

Net Sales 5,463 7,022 7,720 8,451 9,212 9.5%

EBITDA 741 1,065 1,061 1,361 1,511 12.4%

EBITDA Margins (%) 13.6 15.2 13.7 16.1 16.4

Net Profit 570 754 613 839 942 7.7%

EPS (|) 34.3 45.9 37.2 51.0 57.2

P/E 25.8 19.3 23.8 17.4 15.5

RoNW (%) 20.8 22.8 16.8 20.4 20.3

RoCE (%) 24.9 29.8 23.7 27.8 27.6

Source: Company, ICICI Direct Research

Particulars

Particular Amount

Market Capitalization (| Crore) 14,547.1

Total Debt (| Crore) 0.5

Cash and Investments (| Crore) 939.8

EV (| Crore) 13,607.8

52 week H/L 996 / 652

Equity capital 164.2

Face value | 10

Key Highlights

Top client growth, improvement in

deal TCV and digital revenues to be

key growth drivers

Levers visible to improve margins

from here on. Employee pyramid,

offshoring, pricing, utilisation and

annuity business to drive margins

Revise our EPS and multiple upwards

and arrive at a revised target price of

| 945/share

Research Analyst

Devang Bhatt

[email protected]

Deepti Tayal

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Result Update | MindTree Ltd

Exhibit 1: Variance Analysis

Q3FY20 Q3FY20E Q3FY19 YoY (%) Q2FY20 QoQ (%) Comments

Revenue 1,965.3 1,968.7 1,787.2 10.0 1,914.3 2.7

US$ revenues grew 1.5% QoQ to $275 million led by

technology, media & services vertical

Employee expenses 1,253.5 1,273.7 1,114.2 12.5 1,264.7 -0.9

Gross Margin 711.8 694.9 673.0 5.8 649.6 9.6

Gross margin (%) 36.2 35.3 37.7 -144 bps 33.9 228 bps

SG&A expenses 405.5 409.5 389.7 4.1 401.4 1.0

EBITDA 306.3 285.5 283.3 8.1 248.2 23.4

EBITDA Margin (%) 15.6 14.5 15.9 -27 bps 13.0 262 bps

Adjusted EBITDA margins expanded 262 bps QoQ on

account of pyramid rationalisation (150 bps), currency

benefit (50 bps) and stability in project cost (70 bps)

Depreciation 69.9 72.8 41.0 70.5 70.7 -1.1

EBIT 236.4 212.6 242.3 -2.4 177.5 33.2

EBIT Margin (%) 12.0 10.8 13.6 -153 bps 9.3 276 bps

Other income 34.8 20.1 -20.0 -274.0 19.7 76.6

PBT 271.2 232.7 222.3 22.0 197.2 37.5

Tax paid 66.2 58.0 26.3 151.7 59.2 11.8

PAT 197.0 160.9 191.2 3.0 135.0 45.9PAT came in above our estimates on the back of

higher other income

Key Metrics

Closing employees 21,561 21,767 19,908 8.3 21,267 1.4

Attrition (%) 17.2 15.3 13.4 380 bps 16.5 70 bps

Attrition spiked sharply by 70 bps QoQ. However, the

management has indicated that attrition will stabilise

in coming quarters

Utilisation ex-trainees(%) 78.0 77.5 76.4 160 bps 79.0 -100 bps

Average $/| 71.4 71.2 71.1 0.5 70.6 1.1


Exhibit 2: Change in estimates

FY22E Comments

(| Crore) Old New % Change Old New % Change Introduced

Revenue 7,723 7,720 0.0 8,557 8,451 -1.2 9,212 Introduced FY22E in the quarter

EBITDA 1,004 1,061 5.6 1,284 1,361 6.0 1,511

EBITDA Margin (%) 13.0 13.7 74 bps 15.0 16.1 110 bps 16.4

We revise our margin estimates upwards

considering multiple levers available to the

company

PAT 553 613 10.8 752 839 11.6 942Upward revision in operating margins lead to

increase in PAT estimates

EPS (|) 33.7 37.2 10.4 45.8 51.0 11.3 57.2

FY20E FY21E





Conference Call Highlights

Revenue outlook: A few strategic things that MindTree is aiming at

is transitioning the company from project based to more annuity

base, which will give the company flexibility in utilisation and

pricing. This has also led to higher fixed cost projects (which

increased 280 bps to 58.7% in current quarter). Although this will

take time, it will provide stability to revenues. The company is also

focusing in client mining, scaling up the existing clients to US$50

million and cutting the tail end clients. The company has also set up

a large deal team to achieve the same. This gives us comfort on long

term growth trajectory in revenues

Margin walkthrough: In terms of margins, the company expects a

QoQ improvement in margins in coming quarters. MindTree aims to

do so through cut discretionary spend in SG&A, pyramid

rationalisation, improving utilisation & pricing and improving annuity

revenues

Key draggers in quarter: Pointers that were key draggers in this

quarter were 1) dip in total TCV by 32.6% QoQ, 2) increase in attrition

to 17.2% (vs. 13.4% in Q3FY19), 3) decline in top 6-10 and 4) poor

growth in digital revenues. On the same, the management said that

decline in total TCV was due to delay in deal closure. Increase in

attrition for last four to five quarters has been mainly due to the

leadership transition phase.The management indicated that attrition

is stabilising. We expect to see this improving in coming quarters

Order book: The company’s order book declined 32.6% QoQ to

US$207 million wherein TCV from new declined 34.7% YoY and

from renewals dipped 31.2% YoY. Delay in deal closure and change

in management could have led to a dip in TCV. We expect renewals

to gain momentum in coming quarters. The digital order book

declined 9.3% QoQ to US$127 million. Digital order book accounts

for 61% of overall order book. Dip in overall order book was due to

the timing difference. Hence, quarter to quarter volatility could be

there

Clientele details: Top customer contribution to overall revenues was

at 23.1% in the quarter and witnessed growth of 13.9% QoQ. Top 6-

10 customers dipped 2.6% QoQ while top 2-5 customers grew 4.8%

QoQ. The company has cut some of its tail clients. This has led to a

dip in overall clients from 343 to 320. Further, in line with the

company’s strategy to improve client mining, the company has

added one client in the US$25 million bucket

Employee update: With net hiring of 294 in Q3, employee strength

was at 21,561. Utilisation (ex-trainees) declined 100 bps QoQ to 78%

led by furloughs




Key Metrics

Exhibit 3: Geography wise break-up ES

Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

Revenue by geography (%)

US 73.6 73.4 73.6 73.7 73.7 74.6

Europe 18.7 18.7 18.5 17.8 17.6 17.0

India 3.3 3.6 3.7 4.1 4.2 4.0

RoW 4.4 4.2 4.2 4.4 4.5 4.4

Growth QoQ (%)

US 3.3 1.8 4.5 1.0 2.6 2.8

Europe -5.1 2.1 3.1 -3.0 1.4 -1.9

India 8.6 11.3 7.1 11.7 5.1 -3.3

RoW 6.9 -2.6 4.2 5.6 4.9 -0.7


Exhibit 4: Industry wise break-up


Revenue by verticals (%)

Technology, Media & services 39.3 39.4 39.6 39.4 39.8 41.5

BFSI 22.4 21.7 21.8 21.6 21.6 21.3

Retail, CPG & Mfg 21.7 22.3 22.2 22.2 21.7 20.6

Travel & Hospitality 16.7 16.7 16.4 16.8 16.9 16.6

Growth QoQ (%)

Technology, Media & services 3.1 2.3 4.7 0.3 3.6 5.9

BFSI 2.5 -1.1 4.7 -0.1 2.6 0.1

Retail, CPG & Mfg -4.2 4.9 3.7 0.8 0.3 -3.6

Travel & Hospitality 7.8 2.1 2.3 3.3 3.2 -0.3


Exhibit 5: Service offerings break up

Q3FY19 Q2FY20 Q3FY20 QoQ YoY

Revenue by service offerings (%)

Interactive 22.1 23.8 22.3 -4.9 10.4

Data Science and Engineering services 10.9 11 12.1 11.7 21.5

Cloud Services 3.6 3 3.6 21.9 9.4

Others 0.2 0.2 0.2 1.5 9.4

Total Digtal 36.8 38.0 38.2 2.1 13.6

Test Engineering 19 18.7 17.7 -3.9 1.9

Package Solutions 8.3 7 6.5 -5.7 -14.3

Infrastructure Management & Tech Support 23.4 24.6 24.9 2.8 16.4

ADM and Product Engineering 12.5 11.7 12.7 10.2 11.2


Growth was driven by US

Technology, Media & services drove growth

Digital growth was subdued this quarter




Exhibit 6: Client & human resource matrix


Client metrics

$1 mn Clients 111 116 120 122 130 134

$10 mn Clients 21 21 23 23 21 22

$25 mn Clients 4 4 4 4 4 5

$50 mn Clients 1 1 1 1 1 1

$100 mn Clients 1 1 1 1 1 1

Headcount, Utilization & Attrition

Total Employees 19402 19908 20204 20935 21267 21561

Utilization (Excluding trainees) 76.5 76.4 77.1 77.9 79.0 78.0


Increase in attrition remains key risk for the

company

The company added 1 clients in US$25 million

bucket




Financial story in charts

Exhibit 7: Dollar revenues to increase 9.0% over FY19-22E

715 780847

242 246 252 262

1001

264 271 275

1092

1190

1297

22.5

9.08.6

20.7

19.517.4

15.818.3

9.4 10.0

9.4

9.0 9.0

9.0

0

10

20

30

40

50

0

300

600

900

1200

1500

FY16

FY17

FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

FY19

Q1FY20

Q2FY20

Q3FY20

FY20E

FY21E

FY22E

%

$ m

illion

Dollar revenue Growth, YoY


Exhibit 8: Revise EBITDA margin estimates

17.6

13.5 13.614.1

15.415.9

15.2 15.2

10.0

13.0

15.6

13.7

16.1 16.4

7

10

13

16

19

FY16

FY17

FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

FY19

Q1FY20

Q2FY20

Q3FY20

FY20E

FY21E

FY22E

%

EBITDA margin


Exhibit 9: PAT trend

553

419

570

158206 191 198

754

93135

197

613

839

50

200

350

500

650

800

950

FY16

FY17

FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

FY19

Q1FY20

Q2FY20

Q3FY20

FY20E

FY21E

| crore

PAT





Exhibit 10: One year forward rolling price to earnings

0

400

800

1200

1600

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Price 25 20 15 10 5





Exhibit 11: Recommendation History vs. Consensus

20.0

40.0

60.0

80.0

100.0

200

400

600

800

1,000

1,200

1,400

Jan-20

Dec-19

Nov-19

Oct-19

Sep-1

9

Jul-19

Jun-19

May-19

Apr-19

Mar-19

Feb-19

Jan-19

Dec-18

Nov-18

Oct-18

Sep-1

8

Aug-18

Jul-18

Jun-18

May-18

Mar-18

Feb-18

Jan-18

Dec-17

Nov-17

Oct-17

Sep-1

7

Aug-17

Jul-17

Jun-17

May-17

Apr-17

Mar-17

Feb-17

Dec-16

(%

)

(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Exhibit 12: Top 10 Shareholders

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Larsen & Toubro Ltd 3-Jul-19 60.6% 99.7 0.9

2 Nalanda India Fund L 30-Jun-19 8.9% 14.6 0.0

3 Krishnakumar N 30-Jun-19 3.7% 6.1 0.0

4 Natarajan Krishnakum 14-Mar-18 3.7% 6.1 -0.3

5 Bagchi Subroto 30-Jun-19 3.1% 5.1 0.0

6 Vanguard Group 30-Nov-19 2.9% 4.7 0.0

7 Amansa Holdings Pvt 30-Jun-19 2.5% 4.1 -0.4

8 Uti Asset Management 30-Nov-19 2.5% 4.1 -0.5

9 Wgi Em Smaller Co Fu 30-Jun-19 1.9% 3.2 0.5

10 Mirae Asset Global I 31-Dec-19 1.8% 2.9 0.4

Source: Bloomberg, ICICI Direct Research

Exhibit 13: Shareholding Pattern

(in %) Jun-19 Sep-19 Dec-19

Promoter 13.32 73.76 73.64

FII 86.68 26.24 26.36

DII 0.00 0.00 0.00

Others 100.00 100.00 100.00





Financial summary

Exhibit 14: Profit and loss statement | crore

FY19 FY20E FY21E FY22E

Total Revenues 7,022 7,720 8,451 9,212

Growth (%) 28.5 9.9 9.5 9.0

COGS 4,421 5,041 5,349 5,812

Other Expenses 1,536 1,618 1,741 1,888

EBITDA 1,065 1,061 1,361 1,511

Growth (%) 43.8 (0.4) 28.3 11.0

Depreciation 164 278 304 332

Other Income 89 87 95 108

Interest paid 3 52 53 54

PBT before Exceptional Items 987 818 1,099 1,233

PBT 987 818 1,099 1,233

Growth (%) 32.9 (17.1) 34.4 12.3

Total Tax 233 205 259 291

PAT before MI 754 613 839 942

Minority Int & Pft. from associate - - - -

PAT 754 613 839 942

EPS - diluted 45.9 37.2 51.0 57.2

EPS (Growth %) 34.0 (19.0) 36.9 12.3


Exhibit 15: Cash flow statement | crore


Net profit before Tax 987 818 1,099 1,233

Depreciation 164 278 304 332

(inc)/dec in Current Assets (366) (277) (237) (307)

(inc)/dec in current Liabilities 130 74 17 53

CF from operations 630 593 801 885

Other Investments (23) 87 95 108

(Purchase)/Sale of Fixed Assets (171) (309) (338) (368)

CF from investing Activities (193) (222) (243) (260)

Inc / (Dec) in Equity Capital 0 - - -

Inc / (Dec) in sec.loan Funds (300) - - -

Dividend & Dividend tax (218) (270) (369) (415)

Interest Paid on Loans (4) (52) (53) (54)

CF from Financial Activities (522) (322) (422) (469)

Cash generating during the year (72) 50 136 156

Opening cash balance 329 257 307 443

Exchange rate differences 13 - - -

Closing cash 256 307 443 599


Exhibit 16: Balance sheet | crore


Equity 164 164 164 164

Reserves & Surplus 3,142 3,486 3,956 4,483

Networth 3,307 3,650 4,120 4,647

Minority Interest - - - -

Total Debt 1 1 1 1

Other long term liabilities 17 17 17 17

Source of funds 3,324 3,668 4,138 4,665

Net Block 376 407 440 477

CWIP 30 30 30 30

Other intangible assets&Goodwill 591 591 591 591

Other long term assets 415 475 555 635

Current investments 684 684 684 684

Debtors 1,336 1,452 1,609 1,733

Cash & Cash equivalents 256 307 443 599

Loans and advances 12 14 15 18

Other Current Assets(OCA) 480 639 718 898

Trade payables 213 231 253 276

Other Current liabilities 502 544 541 584

Provisions 140 154 152 138

Application of funds 3,324 3,667 4,138 4,665


Exhibit 17: Key ratios | crore

(Year-end March) FY19 FY20E FY21E FY22E

Per share data (|)

Adjusted EPS (Diluted) 45.9 37.2 51.0 57.2

BV per share 201.4 221.6 250.1 282.1

DPS 27.0 16.4 22.4 25.2

Cash per Share 15.6 18.6 26.9 36.4

Operating Ratios

EBITDA Margin (%) 15.2 13.7 16.1 16.4

PBT Margin (%) 14.1 10.6 13.0 13.4

PAT Margin (%) 10.7 7.9 9.9 10.2

Debtor days 69 69 69 69

Creditor days 11 11 11 11

Return Ratios (%)

RoE 22.8 16.8 20.4 20.3

RoCE 29.8 23.7 27.8 27.6

RoIC 38.2 29.6 35.4 35.2

Valuation Ratios (x)

P/E 19.3 23.8 17.4 15.5

EV / EBITDA 12.8 12.8 9.9 8.8

Price to Book Value 4.4 4.0 3.5 3.1

EV / Net Sales 1.9 1.8 1.6 1.4

Market Cap / Sales 2.1 1.9 1.7 1.6

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 2.1 2.3 2.5 2.7

Quick Ratio 2.1 2.3 2.5 2.7





Exhibit 18: ICICI Direct coverage universe (IT)

CMP M Cap

(|) TP(|) Rating (| Cr) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E

HCL Tech (HCLTEC) 595 600 Hold 152,663 37.3 38.4 42.8 15.1 14.7 13.2 10.5 9.3 7.9 26.9 25.3 24.7 24.5 21.4 20.6

Infosys (INFTEC) 765 890 Buy 336,424 35.4 39.3 45.3 21.8 19.7 17.1 14.9 13.4 11.3 32.9 32.2 34.5 23.7 24.2 25.5

MindTree (MINCON) 886 945 Hold 14,547 45.9 37.2 51.0 19.3 23.8 17.4 12.8 12.8 9.9 29.8 23.7 27.8 22.8 16.8 20.4

L&T Intotech (LTINFO) 1,946 2,025 Buy 30,033 87.3 89.3 103.6 19.8 19.4 16.7 14.8 13.4 11.2 40.4 34.5 33.6 31.0 26.5 25.8

NIIT Tech (NIITEC) 1,807 1,415 Hold 8,931 65.7 73.6 83.2 22.1 20.3 17.7 12.4 10.6 9.2 25.2 23.5 23.8 19.5 19.2 19.2

TCS (TCS) 2,201 2,005 Hold 739,500 83.8 86.2 95.5 23.4 22.8 20.6 17.7 16.6 14.8 43.8 42.6 43.9 34.4 33.4 34.4

Tech M (TECMAH) 792 900 Buy 70,424 47.7 47.6 54.9 16.4 16.4 14.3 9.9 9.8 8.3 23.6 21.2 21.9 21.2 18.5 18.7

Wipro (WIPRO) 246 285 Buy 148,149 14.9 17.6 19.1 16.5 14.0 12.9 10.0 9.5 8.2 17.8 19.0 18.9 15.8 18.3 17.9

RoE (%)

Sector / Company

EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)





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]




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managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other

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Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

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