Why Mindtree Stands Out Among Peers During Virus Turmoil

When the new coronavirus pandemic froze economic activities worldwide, one mid-sized Indian information technology company bucked the trend.Mindtree Ltd., acquired by the Larsen & Toubro Ltd. in 2019., is the only software services provider that has gained so far this year on the Nifty IT Index, becoming the most expensive stock among peers, aided by robust deal wins. Shares of the Bengaluru-based company have risen 10 percent year-to-date compared with a 2-32 percent slump for peers and a 14 percent drop in the benchmark gauge..Mindtree’s trailing 12-month price-to-earnings multiple surpassed that of the sector’s historically most expensive stock, Tata Consultancy Services Ltd. The Bloomberg consensus, however, pegs Mindtree’s one-year forward P/E at 19.5 times compared with TCS’ 22.5 times because the mid-sized firm is expected to see a higher profit growth than its larger peer..Mindtree’s performance came as the novel coronavirus outbreak stalled trade and domestic equities tracked global peers in the worst selloff in more than a decade. Most IT companies faced disruptions as they generate most of their business overseas and the bulk of it comes from clients in financial services, manufacturing and communications sectors. TCS expects its revenue to contract in the ongoing financial year..Why Mindtree Stands Out.Strong Deal Wins.Mindtree won deals worth $393 million, the highest ever, in the quarter ended March compared with $207 million in the three months through December. Its total contract value for 2019-20 was 14.5 percent higher over previous year at $1.2 billion.The new leadership has been on course to tie in long-term annuity deals—when a fixed sum is realised annually for the number of years contracted—and reduce project-based exposure, according to Investec.The company has also won deals in travel technology and manufacturing verticals, an area many of its peers have seen the sharpest drop in demand.According to Kotak Institutional Equities Ltd., the company’s lack of exposure to business process outsourcing, too, helped as the business is least amenable to work from home.Debashis Chatterjee, managing director and chief executive officer at Mindtree, said the company’s deal pipeline continued to be “healthy”. “We have made key inroads into cloud and are receiving good traction in the SAP areas. New wins reported throughout the year have ramped up as expected,” he said in a post-earnings conference call.Also, a key concern that Mindtree may lose many of its main clients after L&T took over the company didn’t come to pass. “Our annual client satisfaction survey results received in this quarter had all-time high ratings,” Chatterjee said. “The overall relationship index is better than that of previous years, reflecting increased trust and confidence of clients in Mindtree.”At a time Infosys Ltd., Wipro Ltd. and global peer Cognizant Technology Solutions Corp. suspended their practice of offering growth projections amid the uncertainty from the Covid-19 crisis, Mindtree indicated a ramp-up of new deals despite a possibility of discounts sought by clients..Better Earnings Outlook.While the Bloomberg consensus of analyst estimates Mindtree’s revenue growth for the ongoing financial year at 5.5 percent, it estimates the company’s earnings per share to rise 27 percent—the highest among peers.Mindtree has been able to uphold project executions and delivery, while 98 percent of its workforce transitioned to work from home without significant costs, Axis Capital Ltd. said. It also intends to take up wage hikes in the first quarter of 2020-21, indicating confidence in terms of operational costs..According to Axis Capital and PhillipCapital (India) Pvt. Ltd., the company’s initiatives to reduce subcontractor costs, rationalise management structure and improve operational efficiency with high employee utilisation levels may aid margin and profit. HDFC Securities Ltd., too, sees sustainable improvement. And expanding operating margin means higher profitability..The Risks.Client Concentration.Mindtree, according to Kotak Institutional Equities, relies heavily on its top clients. This cohort added $5.5 million to the company’s incremental revenue, offsetting a $2.3-million decline in contribution by other clients to the top line, the brokerage said in a note without disclosing names. “Top client concentration is alarmingly high and poses long-term risk.”Most of Mindtree’s stability comes from just five clients. Mindtree’s top client, according to Axis Capital, contributed 24.8 percent to the revenue as of March compared with 23.1 percent in the preceding quarter and 19.8 percent a year ago. The five clients collectively contribute 37.9 percent to the company’s top line against 36.1 percent as of December and 33.2 percent last year.Should any of the key clients falter, it could have repercussions on Mindtree’s earnings.According to Investec, any decline in top clients’ contribution can magnify Mindtree’s revenue decline across verticals. A delay in start of new deals and lowering the scope of existing deals is another risk. A higher-than-expected drop in margin on account of curtailed revenue growth may impact profitability, said Investec, which has a ‘Hold’ rating on Mindtree..Muted Performance Of Some Verticals.Barring hi-tech and media, it was a muted fourth quarter for manufacturing, banking, financial services and insurance, and travel and hospitality. While hi-tech and media account for 43 percent Mindtree’s revenue, manufacturing, BFSI and travel and hospitality contribute 57 percent. Besides, weakness in the global economy poses a high risk to operations in these segments..Why 2020 Could Be Indian IT’s Worst Year Yet.Analyst View.Of the 36 analysts tracking the stock, 14 have ‘buy’ ratings, nine suggest a ‘hold’ and 13 have ‘sell’ ratings. The average of 12-month price targets tracked by Bloomberg imply a downside of 12.6 percent from Thursday’s closing price.

Why Mindtree Stands Out Among Peers During Virus Turmoil

Shares of Mindtree have gained 10% this year, outperforming peers during virus turmoil. Here’s why...

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