Mindtree Slumps 11% Even After Posting 88% Increase In Q2 Profit

Shares of Mindtree Ltd tanked over 11 percent to Rs 1,262 on Friday, a day after the company posted its results for the September ended quarter.

The IT company, which is now owned by L&T Ltd, posted a 88 percent rise in its net profit to Rs 253.7 crore for the second quarter of 2020-21 from the same period a year ago. When compared to the June quarter, its profit was up 19.1 percent from Rs 213 crore.

The consolidated dollar revenue was up 3.1 percent at $261 million against $253.2 million.

Investors have been looking for cues of how companies have been faring after the outbreak of COVID-19 and some may not be satisfied with Mindtree's numbers, which met street expectations unlike its larger peers Infosys and TCS, which exceeded analysts' expectations with their Q2 results.

The midcap company's revenue from its top client, Microsoft, declined by 1 percent. Microsoft accounts for about 28.9 percent of its total revenues.

Its overall deal wins were in the range of $303 million for the September-ended quarter, which is lower than the previous quarter's $391-million signed contracts.

Mindtree added 8 new clients in Q2, taking the total number of active clients to 283 as of 30 September 2020.

The company reported a good profit on the back of operational efficiencies and improved utilization. Cost savings from offshore accounts, travel and other savings helped improve operating metrics. Mindtree's EBIT margins came at 16.7 percent, up 1.60 percent from the previous quarter, which has been encouraging.

Brokerage views

"Focus on improving margins has yielded good results. Reduction in subcontractor usage, focus on re-skilling as opposed to lateral hiring for key skills, lower variable compensation, wage hike deferrals, cost rationalization in small accounts are levers that Mindtree can flex to protect margin profile," said Kotak Institutional Equities in a report.

Motilal Oswal upgraded its FY21/FY22 EPS estimates by 4 percent/3 percent as it adjusted revenue/margin trajectory with the margin surprise. Downgrading the stock to "neutral" rating, the brokerage said that while Mindtree has been one of the best performers in 2020 in the IT sector, with returns of 77 percent YTD (year-to-date), it believes the key positives are already captured and see limited upside hereafter.

Dolat Capital has a "sell" call on the stock with a target price of Rs 1,190 per share saying that weakness in top client and significant offshore shift (nearly 200bps that will lead to some realization moderation) has moderated its revenue estimates marginally for FY21/22 by 1 percent/2 percent respectively. It sees current valuations unwarranted.

Emkay Global Financial also has a sell call on Mindtree. It said that the company's September quarter revenues grew at lower than consensus expectations, though margins remained strong driven by better-operating efficiencies.

Net profit beat consensus estimates on better EBITM and forex gain, it said.

"MTCL's revenue performance was skewed, with the top client driving incremental revenue. We expect a steady performance in the top client, however, increased concentration and growth dependency remain a concern," the brokerage said.

On the other hand, ICICI Direct has a "buy" rating on Mindtree with a target price of Rs 1,680 as it believes the company's expertise in digital technology will make it a key beneficiary of improved traction in the cloud in the coming years. In addition, vendor consolidation opportunities, improving win ratio, increase in annuity business will provide long term visibility to revenues, the brokerage said.