Highlights:

Revenue Growth - Flat: For Q1FY13 MTCL reported a volume growth of 19bps, pricing improvement of 43bps offset by -42bps cross currency headwinds, thus 0.4% growth to $105.5mn (SPA est. 106mn). Its revenue grew to Rs5.6bn up 7.1% sequentially. The growth was mainly fueled by “Top 2-5 clients” who grew by 8.8% sequentially contributing 25.9% to the overall revenue as against 23.9% in Q4FY12.

Margins – To be under pressure: EBITDA margins expanded by 210bps to 20.9% on the back of (i) INR depreciation (230bps) (ii) Operational Efficiency (80bps) partially offset by (iii) Salary and wage hikes (-100bps) given to 80% of the employees in June, full effect of which would be visible in Q2FY13 putting pressure on margins. PAT grew by 29.2% sequentially to Rs890mn registering an EPS of Rs21.6/share.

Business Domains: Infrastructure service led the growth at 16% sequentially, followed by Development (4.1%) and Maintenance (2.8%). Consulting (-2.5%) and PI (-16.3%) were the laggards owing to their discretionary nature. Except PES (-5.1%) all verticals registered growth led by BFSI (4.2%) and Manufacturing (3.8%). Europe showed the most traction due to increased off shoring by growing at 4.4% QoQ while US contribution was up by 1.8%.

PES Business – to remain flat: PES business’s contribution to overall revenue has declined from 34.5% of revenue in FY12 to 31% in Q1FY13. Though the company has added a large number of clients in the cloud engineering space, the ramp ups are slower owing to the unclear economic scenario. With the clients remaining positive about their budget spends PES is expected to grow in the 2HFY13 translating into flat FY13 YoY growth.

Guidance: Mindtree management is hopeful to report FY13 USD revenue growth in-line with NASSCOM’s projection of 11-14% for which they would have to grow at 4.0% sequentially for the next three quarters. The growth is considered to be back ended thus closer to the lower end of the NASSCOM projection.

Outlook and Recommendation: SPA Securities' continues to build a 12.2%/17.1% USD revenue growth in FY13E/14E on the back of its strong deal pipeline in the IT Services and traction in non-linear IMTS business. They expect the margins to come off a bit from Q1FY13 levels due to (i) wage hikes (ii) currency appreciation and (iii) investment in sales team; first glimpse of which would be visible in Q2FY13 results. They have factored EBITDA margins of 17.6%/16.4% for FY13E/FY14E. They expect an EPS CAGR of 12.3% over FY12-14E to Rs68.1. Thus SPA Securities' recommend HOLD for the stock with a two year target price of Rs682 based on 10x FY14E earnings.