Limited upside potential in Mindtree after Q2 results, says Motilal Oswal

Stating that all key positives in Mindtree have been factored in, brokerage firm Motilal Oswal sees limited upside potential in the IT stock.

Motilal Oswal maintained its ‘neutral’ rating on Mindtree due to its fair valuations (based on 22x FY24E P/E), softness in retail and constraints on management bandwidth because of its impending merger with L&T Infotech.

The brokerage raised its FY23/FY24 EPS estimates by 3%/6% due to strong growth and margin beat.

“Mindtree reported 2QFY23 revenue of $422million (up 7.2% QoQ), 210bp ahead of our estimate. Deal TCV in 2QFY23 was strong at $518 million, up 44% YoY, and aided the company to surpass $1-billion TCV in 1HFY23,” the brokerage said in its report.

The company’s EBITDA margin contracted 10bp QoQ (50bp ahead of MOFSLe) to 21.0%, despite the full impact of wage hikes during the quarter.

The company was able to compensate for this through operational efficiency, currency support and reversal of a one-off cost last quarter, it stated in the report.

“Mindtree’s management indicated that it has started to witness some softness and caution in parts of the business (especially in Europe), although these appear to be transitory in its opinion. Management remains confident that MTCL will be able to take advantage of the acquired projects that are cost-saving in nature, thereby boosting both performance and TCV,” it said.

“Strong commentary in other verticals, deal pipeline, and TCV should help it deliver solid revenue growth in FY23E, as we expect USD revenue CAGR of 16.5% over FY22-24,” it added.

The brokerage sees a target price of the stock at Rs 3,350 which is already achieved in today’s trade.

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