21 November 2017
C
orner
O
ffice
the
Interaction with the CEO
A play on business momentum revival
Upgrade to Buy
Mindtree
Revenue growth at MTCL had faltered from its otherwise industry-leading trajectory,
courtesy weakness in top clients exacerbating the already existent traditional pressures.
Smaller deal sizes in Digital restricted MTCL’s ability to contain headwinds despite it
forming a high proportion of revenue.
With Digital becoming mainstream and top clients seeing stability, we expect a revival in
revenue growth momentum. At parallel, margin improvement should be a function of
initiatives both at an organic and inorganic level. Following our interaction, we believe
that the margin recovery could play out sooner, especially if Magnet360 and Bluefin
EBITDAs revert to the black.
We see MTCL’s margins improving to 14.4% by FY19 and potentially by another 110bp to
15.5% by FY20, driving 7%/8% upgrade in our earnings estimates for FY19/FY20. Such
combination of growth and margin performance warrants a re-rating. Our revised price
target of INR600 discounts forward earnings by 15x. We upgrade MTCL to Buy.
Mr Rostow Ravanan—
CEO, Managing Director
Mr Rostow Ravanan has played
a pivotal role in the growth and
success of Mindtree since
inception. As CEO and
Managing Director, he is
responsible for providing
strategic direction and
achieving industry-leading
growth for Mindtree. He is
focused on delivering superior
financial performance along
with high customer and people
satisfaction with a goal to make
Mindtree a memorable
company.
In his most recent role, he
headed the Enterprise Service
Lines group and was
responsible for growing
Mindtree’s European
operations, across both
existing and new clients.
Previously, Mr Ravanan has
also served as the Chief
Financial Officer for more than
10 years, where he was
responsible for finance and
allied functions.
The lackluster recent growth rates at MTCL and the industry
The industry’s growth rate has softened, largely led by account-specific concerns
across vendors. At MTCL (and peers), this has been compounded by cost pressures in
traditional segments. The combination of challenges has not been completely offset
by Digital, given its much lower base. Add to that the deflationary impact from Cloud
and SaaS options to infrastructure and applications, respectively, and the growth
environment gets tougher.
That said, the median deal sizes in Digital have seen significant improvement, and
are up as much as ~3x compared to the early days a couple of years ago. Growth of
Digital base and resolution of account-specific issues are likely to help drive
improvement in overall revenue traction, going forward.
To corroborate that is a significantly improved pipeline, which is also a reflection of
MTCL’s improved perception as a provider of Digital solutions. Endorsement of its
capabilities by the Analyst community (such as Gartner) has also played a key part.
Digital becoming mainstream-enough for offshore
With the novelty of Digital and MTCL growing revenues mainly at onsite, the share of
onsite revenues grew from 34.5% in 4QFY12 to 60.5% in 4QFY17. However, more and more incremental business
in Digital will be carried out from offshore, as the capabilities have built up over time. Onsite revenues will not
come down, but offshore will take over gradually.
MTCL already has 80+ sales plays within Digital. Over the last few years, everything – from training to sales
methods – has undergone significant change. The overarching encapsulation has been of selling solutions to
clients rather than technologically-qualified staff.
Margins should only go up
The margins in acquired entities of Bluefin and Magnet360 suffered amid revenue volatility as a consequence of
high fixed cost base from expensive consulting. The combined EBITDA margin is loss of 15-20% compared to 6-7%
positive EBITDA at the time of acquisition. This should recover, going forward, and the attempt is to resurrect
profitability here to at least pre-acquisition levels.
Ashish Chopra - Research analyst
(Ashish.Chopra@motilaloswal.com); +91 22 6129 1530
Sagar Lele - Research analyst
(Sagar.Lele@motilaloswal.com); +91 22 6129 1531
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.