Mindtree share price: ICICI Securities downgrades stock to ADD (from BUY), price target Rs 1661

Mindtree share price: ICICI Securities says that potential for further margin surprise was the key rationale behind earlier BUY rating. Besides transient Covid-led tailwinds, Mindtree’s margin expansion was aided by sustainable and structural changes in costs. While ICICI Securities expected parity with the cost structure of LTI by FY23E, the convergence has happened earlier! As some of the Mindtree operational metrics (e.g. utilisations, salary costs) recalibrate towards their new normal, margins are more likely to contract (than be stable or increase).

Incrementally, as investor focus shifts from mere cost structure correction to growth, ICICI Securities see limited margin of safety for disappointments given the favourable FY21 base. ICICI Securities downgrade Mindtree to ADD (from BUY)

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Mindtree in-line revenues, robust beat on margins; surprisingly lower salary costs:

Mindtree revenue growth (4.6% QoQ, CC) was slightly ahead of estimates. Growth was broad-based across all key geographies – US, Continental Europe, UK and Ireland. Barring BFSI, which remained largely stable, growth across verticals too was broad based. Sequentially, Mindtree EBIT margins improved 290 bps and were 220 bps ahead of estimates.

This was majorly due to two factors:

Firstly, utilisations (including trainees) witnessed 430bps QoQ improvement as Mindtree catered to some of the incremental demand through reskilling existing workforce, rather than hiring new talent.

Secondly, as is the case with the rest of the industry, Mindtree too had seen the benefit of incremental project ramp-ups happening largely offshore due to restricted travel. Secondly, overall employee benefit expense sequentially remained considerably stable (at Rs12.6bn).

However, it is key to note that Mindtree employees' salary costs declined by Rs 640 mn even as EOP headcount increased (by 370).

Mindtree Management expects industry-leading growth and >20% EBITDA margins:

Total Contract Value (TCV) of deals booked during the quarter was healthy at US$312mn (vs US $303 mn in Q2 FY21). Mindtree Management hinted at an aspiration for industry-leading growth. In addition, the company also hinted at >20% EBITDA margins in the near future (vs 23.5% in the Dec-20 quarter). Incremental hiring, consequent recalibration of utilisations (to 81-82% levels from 83.1%, includes trainees) and impending wage hikes are some of the foreseeable margin headwinds. On the other hand, Mindtree management also hinted at further margin levers that can absorb some of the aforementioned headwinds.