Mindtree share price: Management shares 4x4x4 strategy, Motilal Oswal says bigger aspirations require higher investments

Motilal Oswal attended Mindtree’s Analyst Day meet, where the management shared its new 4x4x4 strategy and opportunities in digital trends. Motilal Oswal believes that the key positives are already captured and see limited upside hereafter. Motilal Oswal’s target price implies 22x FY22 EPS. Maintain Neutral rating on Mindtree with target of Rs 1550. The stock is currently trading at 21x FY22E EPS.

Mindtree stock is currently trading at 21x FY22E EPS.

Mindtree announced its new 4x4x4 strategy, with four industry groups, four service lines, and four geographies. While the four industry groups are in its existing areas of operations, the changes in service lines (Customer Success, Data and Intelligence, Cloud and Enterprise IT) point to an elevated focus on Digital (three out of the four service lines are in the Digital domain). It plans to create local teams and leadership in non-US geographies (UK and Ireland, Continental Europe and Asia-Pacific and RoW) to sell their industry capabilities to a wider client base. Mindtree management also announced strengthening of its Consulting practice to better cross-sell its new service lines to strategic clients.

Healthcare a potential future addition to industry verticals:

Mindtree announced that it is looking to expand its presence in the Healthcare vertical as it is seeing new business overlap between its core verticals of CPG (Consumer Packaged Goods), Retail and Technology into areas like Payer, Provider and Device Manufacturing. n It plans to grow this gradually, using current capabilities and has no plans for significant investments to increase its presence rapidly.

New strategy should aid growth, but would need investments:

Mindtree sees the new strategy of expanded regional focuses and planned expansion into Healthcare as potential additions to its medium-term revenue aspiration of growing above industry growth. But increasing presence in Continental Europe and APAC would require an upfront investment, which can impact Mindtree’s near-term profitability, as its recent margin improvement (660bp YoY in Q2 FY21) was accompanied with a reduction in SG&A spend. We would wait for further progress on the new strategy before baking in any impact into our estimates. n Its Chairman reiterated there is no plan to combine Mindtree and LTI, and any decision will be taken by both managements and not by LT.

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Mindtree Valuation and view:

Since Jul’19, after the disruption pertaining to the ownership change, Mindtree has been taking steps toward achieving stability in its client and employee count. Persistent weakness in the Top 2-10 client bucket (-3.5% QoQ, eight-quarter CQGR of -2%) remains a concern given its 20% contribution to the topline. High exposure to Travel, Transport, and Hospitality is also expected to remain a drag on overall recovery.