21 November 2017
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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.

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the
That leaves the company to tackle one big issue – of expanding margins in the organic business. Adjusted organic
EBITDA in 2QFY18 was 13.8%. This is a predominant focus of the senior leadership, which the company will
gradually address in due course.
We were modeling USD revenue CAGR of 9% over FY17-20 and EBITDA margin to inch up from 12.2% in FY18 to
13.7% in FY19, followed by 14.4% in FY20.
Following our interaction, we believe that the recovery in margins 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. This drives 7%/8% upgrade in our earnings estimates for FY19/FY20.
Going forward, stability in top-10 accounts combined with recent deal wins will drive revenue momentum, while
margins improve on a combination of initiatives in both organic and inorganic businesses.
We believe such a combination of growth and margin performance warrants a re-rating. Our revised price target
of INR600 discounts forward earnings by 15x (18% upside).
We upgrade MTCL to Buy.
MTCL’s average multiple of 14x embeds its worst periods, which have followed the acquisitions (Kyocera earlier,
and Bluefin and Magnet360 now). However, the company has commanded a steep premium to peers, given its
ability to resurrect from issues and demonstrate lengthy periods of outperformance after.
Exhibit 1:
Revenue growth has been weak…
Revenue (USDm)
32.3%
20.1% 18.5%
22.7% 24.8%
16.2%
11.3% 9.6%
Growth (YoY, %)
28.5%
193
7.0%
192.2 195.6 200.1
4.2%
6.8%
0.0% 0.6% 206.2
What has changed in our outlook post the interaction?
141.3 147 147.7 147.8 154.9 180.3 184.4 195.6 199
Source: MOSL, Company
Exhibit 2:
…despite strong deal wins
Deal Wins (USDm)
281
165
165
152
164
207.9 193
204
220
183
314
262
209
207
Source: MOSL, Company
21 November 2017
2

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Exhibit 3:
…led by weakness in top accounts
Revenue (USDm)
27.9%
21.8%
14.3%
7.0% 8.5%
70
75
14.4%
19.9% 19.5%
Growth (YoY, %)
the
12.8%
82
0.0%
81
-4.6%
82
83
5.3%
86
-1.9% -2.0%
69
72
71
82
85
84
85
Source: MOSL, Company
Exhibit 4:
Profitability impacted both on organic growth and because of acquisitions
20.5%
20.5%
Reported EBITDA margin (%)
19.5%
17.6%
19.5%
17.6%
19.1% 18.7%
18.4%
18.5%
16.2%
17.7% 17.1%
14.7%
12.5%
14.3%
15.3%
16.0%
13.3% 13.8%
14.2%
11.1%
11.6%
Excluding acquisitions (%)
13.4%
Source: MOSL, Company
Exhibit 5:
Acquired entities could see a revival back to high single-digit margins
Acquisition revenue (USDm)
10%
0%
3%
2%
-1%
-6%
17
-7%
16
-5%
17
15
-17%
14
-18%
Acquisition EBITDA margin (%)
-
12
12
16
18
Source: MOSL, Company
21 November 2017
3

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the
Valuation and view
MTCL is a focused mid-tier company. It is a play on select verticals (BFSI, Retail,
Travel, Hi-Tech) and services (Digital, IMS, ADM). Its pragmatic strategy has been
backed by strong execution, which has helped the company grow above
industry in its IT Services business. Its overall revenue has grown at a CAGR of
14% over the last five years.
The company remains actively focused on Digital, which continues to grow
ahead of company average. Proportion of Digital to overall revenue has
increased to 42.6% in 2QFY18 from 39% in FY17 and 37% in FY16. MTCL has
been investing to bolster its early mover advantage in Digital through four
acquisitions over FY15-16 around P&C Insurance, SAP HANA, CPG analytics, and
Salesforce.
MTCL has had to grapple with issues around their integration, the flip side of
such a strategy. Both Bluefin and Magnet360 have been under pressure since
acquisition. The subsidiaries together had revenue rate of USD71m at the time
of acquisition, now down to ~USD55m despite pick-up in Bluefin this quarter.
This has dragged margins too.
In addition to this, issues in select top accounts have led to sluggish organic
growth in FY17 (7.5%). Absolute revenue from top 2-5 accounts is down 26%
since 3QFY16 and that from top 6-10 accounts is down 6% since 3QFY16.
However, many of these headwinds are now getting cleared and business
momentum is returning. With stability in top clients and with Digital becoming
mainstream, we expect revenue growth to revive on an organic basis. Coupled
with this, resurrection of profitability would warrant re-rating, given the
aggravation of pressures in recent times. Visibility emerges from an
improvement in EBITDA margins for Bluefin and Magnet360 from the current
cumulative negative 18%. Pre-acquisition, these entities were clocking high
single-digit margins.
We were earlier modeling USD revenue CAGR of 9% over FY17-20 and EBITDA
margin expanding from 12.2% in FY18 to 13.7% in FY19 followed by 14.4% in
FY20. Following our interaction, we believe that the recovery in margins 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 an earnings upgrade of 7%/8% for
FY19/FY20.
The average multiple of 14x over the last 10 years has embedded depressed
times for MTCL, which have followed the acquisitions of Kyocera first, and now
the recent two. The stock has commanded a steep premium to peers on
recovery, given its ability to reconstitute and drive lengthy periods of
outperformance. We believe the 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.
Key triggers
21 November 2017
Uptick in margins on SGA rationalization and utilization expansion
Steady increase in revenue contribution from Digital
Faster uptick in BFSI/Retail & CPG
4

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Key risk factors
the
Continued pressure from delayed project ramp-ups and project cancellations
Weakness in top clients and acquired entities
Pricing decline in traditional deals’ renewal
Exhibit 7:
1-year forward P/B
P/B (x)
Avg (x)
Min (x)
+1SD
6.8
4.8
7.5
4.0
2.9
1.8
1.2
Exhibit 6:
1-year forward P/E
P/E (x)
Min (x)
34.0
26.0
18.0
10.0
2.0
Avg (x)
+1SD
20.9
14.2
4.0
Max (x)
-1SD
27.6
Max (x)
-1SD
5.3
15.9
2.8
0.8
3.0
21 November 2017
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the
Story in charts
Exhibit 8:
New deal wins led by Digital…
Deal Wins (USDm)
281
165 165 152 164
207.9 193 204
220
183
314
209
262
Exhibit 9:
…which has exhibited strong growth
Digital Revenues
In USD m
207
36.6 36.1
32 33 33 32 34.7
42.3 42.6
38.6 39.9 40 39.4 39.6
Source: Company, MOSL
Source: Company, MOSL
Exhibit 10:
Deal wins have consistently bettered revenue
370
320
270
220
170
120
Deal Wins (USDm)
Revenue (USDm)
Exhibit 11:
Efforts proportion at onsite has increased
steadily…
Efforts mix (%)
Onsite
Offshore
88.3 88.5 87.2 85.7 83.7 82.2 79.5 76.5 76.8 77.2
11.7 11.5 12.8 14.3 16.3 17.8 20.5 23.5 23.2 22.8
Source: Company, MOSL
Source: Company, MOSL
Exhibit 12:
…putting margins under pressure…
EBITDA margin (%)
22.2 21.8 21.8 21.7
24.0 22.8 22.6
SGA (%)
23.8
20.8
Exhibit 13:
…despite improved utilization
Incl. Trainees (%)
79.0
75.5
72.0
68.5
65.0
Utilization
Excl. Trainees (%)
21.3 22.3 21.7 20.7 19.8
Source: Company, MOSL
Source: Company, MOSL
21 November 2017
6

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the
Operating metrics
Exhibit 14:
Operating Metrics
1QFY16
Geographic Mix - %
US
Europe
India
APAC
Service Line Mix - %
Development
Maintenance
Consulting
Package Implementation
Independent Testing
IMS & Tech Support
IP Licensing
Vertical Mix - %
Retail, CPG & Manufacturing
BFSI
Travel & Hospitality
Hitech & Media
Others
Project Type - %
FPP
T&M
Efforts Mix - %
Onsite
Offshore
Revenue mix - %
Onsite
Offshore
Utilization - %
Including Trainees
Excluding Trainees
Client Metrics
No. Of Active Clients
New Clients added
Client Buckets
USD1m clients
USD5m clients
USD10m clients
USD20m clients
USD30m clients
USD50m clients
Client Contribution - %
Top client
Top 5
Top 10
Repeat business
67.5
21.9
3.4
7.2
33.4
21.7
3.7
7.2
17.7
14.9
1.4
22.1
26.9
15.6
35.4
0.0
48.9
51.1
18.6
81.4
48.1
51.9
70.3
71.9
218
16
88
28
13
6
0
2
11.0
33.2
48.5
98.9
2QFY16
63.2
26.6
3.2
7.0
31.8
21.0
2.8
13.3
12.8
17.0
1.3
20.6
24.7
13.9
30.4
10.5
49.7
50.3
20.0
80.0
52.4
47.6
71.4
73.3
296
18
92
29
13
6
0
2
10.7
31.8
45.5
98.9
3QFY16
63.5
26.4
2.7
7.4
32.0
19.8
2.6
12.9
12.8
18.1
1.8
20.3
25.1
15.6
30.2
8.7
50.0
50.0
21.1
78.9
54.5
45.5
68.5
69.9
294
23
93
29
13
5
0
2
10.9
32.1
46.2
98.5
4QFY16
65.9
24.5
2.8
6.8
33.0
18.0
4.0
13.6
12.6
17.5
1.3
23.8
24.4
16.4
35.3
0.0
47.7
52.3
22.3
77.7
57.6
42.4
69.4
70.6
348
37
101
31
15
6
0
2
11.7
29.7
42.7
96.0
1QFY17
66.7
23.1
3.1
7.1
32.5
17.3
4.1
13.9
12.8
18.4
1.0
24.1
24.9
15.0
36.1
0.0
48.7
51.3
22.9
77.1
59.5
40.5
71.4
72
343
17
98
31
16
5
0
2
13.1
29.6
42.6
98.2
2QFY17
67.6
21.4
3.5
7.5
31.8
17.8
3.8
13.1
12.4
19.9
1.2
24.2
24.7
14.4
36.7
0.0
50.6
49.4
23.3
76.7
59.2
40.8
71.4
73.1
337
18
107
30
16
6
0
2
14.4
30.0
42.5
97.8
3QFY17
68.7
20.8
3.1
7.4
31.8
17.6
3.9
12.4
12.6
20.3
1.4
24.1
24.1
15.1
36.7
0.0
52.5
47.5
23.5
76.5
60.2
39.8
71.3
72.3
348
21
106
30
17
4
0
2
14.1
30.1
42.3
98.7
4QFY17
69.8
20.8
2.8
6.6
30.8
18.3
4.0
12.6
12.5
20.4
1.3
23.0
24.7
14.9
37.5
0.0
52.8
47.2
22.4
75.6
60.5
39.5
70.9
72.7
328
20
111
30
16
4
0
3
14.3
30.7
41.9
98.7
1QFY18
69.6
21.1
3.0
6.3
32.2
19.0
3.4
11.5
11.8
21.0
1.1
22.7
25.1
14.3
37.9
0.0
52.9
47.1
23.2
76.8
58.0
42.0
73.2
73.8
336
20
113
33
16
3
0
1
15.3
30.1
41.5
98.3
2QFY18
67.5
22.8
3.5
6.3
32.3
17.7
4.0
11.2
12.1
21.8
1.0
22.9
24.8
14.5
37.8
0.0
55.5
44.5
22.8
77.2
57.6
42.4
73.2
74.6
327
24
114
38
16
3
0
1
16.1
30.1
41.9
98.7
Source: MOSL, Company
21 November 2017
7

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Financials and Valuations
Key Assumptions
Y/E March
INR/USD Rate
Revenues (USD m)
Offshore Revenue (%)
Total Headcount
Per Capita Productivity (USD)
Offshore Uilization (%)
Volume growth (%)
Blended Pricing Change (%)
Income Statement
Y/E March
Sales
Change (%)
Cost of Services
SG&A Expenses
EBITDA
% of Net Sales
Depreciation & Amortization
Interest
Other Income
Forex
PBT
Tax
Rate (%)
PAT
Change (%)
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loan
Capital Employed
Gross Block
Less : Depreciation
Net Block
CWIP
Other LT Assets
Investments
Curr. Assets
Current Investments
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
Current Liab. & Prov
Current Liabilities
Other liabilites
Provisions
Net Current Assets
Deferred Tax
Application of Funds
E: MOSL Estimates
FY15
61.0
584
54.3
14,795
39,458
71.9
13.4
2.7
FY16
65.6
715
46.6
16,958
42,175
69.9
16.5
5.2
FY17
67.2
780
40.2
16,604
46,964
71.3
5.0
3.9
FY18E
65.1
835
42.4
17,932
46,552
73.6
7.0
0.1
FY19E
66.8
924
42.4
19,423
47,569
74.5
10.1
0.6
FY20E
67.0
1,011
42.1
20,820
48,570
75.5
9.0
0.4
(INR Million)
FY20E
67,753
9.8
44,367
12,865
10,521
15.5
2,273
(70)
806
338
9,462
2,365
25.0
7,096
23.7
(INR Million)
FY20E
1,639
30,291
31,930
95
32,025
19,910
13,492
6,418
298
7,962
58
26,161
6,330
11,824
3,747
20
4,241
9,440
2,594
6,845
16,722
567
32,025
FY15
35,619
17.5
20,741
7,786
7,092
19.9
1,018
1
656
179
6,908
1,545
22.4
5,363
18.5
FY16
46,896
31.7
28,026
10,571
8,299
17.7
1,332
3
417
393
7,774
1,741
22.4
6,033
12.3
FY17
52,364
11.7
34,125
11,058
7,181
13.7
1,858
191
553
(136)
5,549
1,363
24.6
4,186
-31.3
FY18E
54,384
3.9
36,265
11,476
6,644
12.2
1,861
100
1,153
109
5,944
1,501
25.3
4,443
7.1
FY19E
61,679
13.4
40,541
12,250
8,888
14.4
2,079
10
581
258
7,638
1,910
25.0
5,729
29.4
FY15
837
19,287
20,124
357
20,485
8,879
4,366
4,513
354
2,699
8
18,526
5,343
6,963
3,763
836
1,621
6,064
536
5,528
12,462
449
20,485
FY16
1,678
22,278
23,956
1,090
25,046
10,323
5,698
4,625
232
9,737
58
18,148
2,101
9,728
2,332
1,570
2,417
7,941
1,679
6,262
10,207
602
25,461
FY17
1,680
24,091
25,771
314
26,085
13,029
7,279
5,750
192
6,672
58
20,610
8,094
8,962
2,508
12
1,034
6,843
1,651
5,192
13,767
624
27,063
FY18E
1,639
23,963
25,602
95
25,697
14,490
9,140
5,350
298
7,091
58
20,170
6,330
9,636
-53
16
4,241
7,836
1,754
6,082
12,334
567
25,697
FY19E
1,639
26,739
28,378
95
28,473
17,200
11,219
5,981
298
7,527
58
22,661
6,330
10,806
1,267
18
4,241
8,619
2,292
6,327
14,042
567
28,473
21 November 2017
8

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the
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtors (Days)
Fixed Asset Turnover (x)
Cash Flow Statement
Y/E March
CF from Operations
Cash for Working Capital
Net Operating CF
Net Purchase of FA
Free Cash Flow
Net Purchase of Invest.
Net Cash from Invest.
Proc. from equity issues
Proceeds from LTB/STB
Dividend Payments
Cash Flow from Fin.
Exchange difference
Net Cash Flow
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
E: MOSL Estimates
FY15
31.9
38.0
119.8
8.5
26.6
15.9
13.4
10.7
2.1
4.2
1.7
29.4
32.8
45.4
71
7.9
FY16
35.9
43.8
142.4
10.5
29.3
14.1
11.6
9.7
1.7
3.6
2.1
27.4
30.6
34.4
76
10.1
FY17
24.9
34.2
153.0
10.0
40.2
20.4
14.8
10.4
1.4
3.3
2.0
16.8
20.1
21.7
62
9.1
FY18E
28.5
38.6
156.8
13.5
47.3
17.8
13.1
11.5
1.4
3.2
2.7
17.3
18.1
20.3
65
10.2
FY19E
35.1
47.8
173.8
15.0
42.8
14.5
10.6
8.4
1.2
2.9
3.0
21.2
25.1
25.7
64
10.3
FY20E
43.5
57.4
195.5
18.0
41.4
11.7
8.8
6.9
1.1
2.6
3.5
23.5
27.5
29.5
64
10.6
(INR Million)
FY20E
7,347
-427
6,921
-2,710
4,211
623
-2,087
0
0
-2,954
-2,954
0
1,880
1,267
1,880
3,747
FY15
5,546
489
6,035
-1,851
4,184
823
-1,028
420
-4
-1,712
-1,296
-197
3,514
1,184
3,514
3,763
FY16
6,555
-1,207
5,348
-1,322
4,026
367
-955
841
-5
-2,129
-1,293
0
3,100
3,763
3,100
2,332
FY17
5,350
1,789
7,139
-2,666
4,473
553
-2,113
2
-5
-2,031
-2,034
0
2,992
2,332
2,992
2,508
FY18E
5,042
-663
4,379
-1,567
2,812
1,153
-414
-41
-4
-2,679
-2,724
0
1,241
2,508
1,241
-53
FY19E
6,969
-389
6,580
-2,710
3,870
581
-2,129
0
0
-2,954
-2,954
0
1,497
-53
1,497
1,267
21 November 2017
9

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Mindtree
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Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
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offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
21 November 2017
10