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Mindtree Tumbles After Q4 As Analysts See Limited Upside, Margin Woes

Here's what analysts made of Mindtree's Q4 FY22 results.

Mindtree campus. (Source: BloombergQuint)
Mindtree campus. (Source: BloombergQuint)

Analysts expect Mindtree Ltd.'s margin to face pressure in the ongoing fiscal as costs rise with opening up of travel and salary hikes planned, but positive operating leverage and efficiency measures should help to stabilise it.

The mid-sized software services firm saw its EBIT margin narrow 50 basis points sequentially to 18.94% in the three months to March 31, according to an exchange filing. Its revenue and net profit, however, rose.

Key Highlights (Consolidated, QoQ)

  • Revenue in constant currency terms stood at Rs 2,897.4 crore, up 5%.

  • Net profit up 8% at Rs 473.1 crore.

  • EBIT up 3.8% at Rs 548.7 crore.

  • Declared a final dividend of Rs 27 apiece.

According to the management, growth was broad-based across verticals, barring retail, and demand environment remained strong. The total contract value of deal wins in the quarter was around Rs 2,976 crore ($390 million), up 10% sequentially, with the company onboarding 11 new clients.

Attrition spiked to 23.8% from 21.9% in the previous quarter. The company, however, said it has ramped up hiring with a net addition of around 3,100 employees during the quarter. It will increase fresher hiring and expects attrition to stabilise over the next few quarters.

Shares of Mindtree fell over 8%, the worst in 18 months. Analysts see limited upside potential for the company on account of its premium valuation and as all key positives are factored in.

Of the 43 analysts tracking the company, 16 recommend a ‘buy’, 19 suggest a ‘hold’ and eight have a ‘sell’ call, according to Bloomberg data. The average of the 12-month price targets implies an 22.6% upside.

Mindtree Tumbles After Q4 As Analysts See Limited Upside, Margin Woes

Here's what analysts made of Mindtree's Q4 FY22 results:

Morgan Stanley

  • Maintains 'equalweight', cuts target price by 13% to Rs 4,450, still implying a potential upside of 12%.

  • FY22 total contract value grew 16.7% YoY and last 12 months book-to-bill has been moderating, which gives limited visibility on growth.

  • Ramp-down of a client project in retail impacted growth in the U.K. and Ireland and dragged overall growth.

  • Mindtree has managed margins well in FY22 but cost headwinds are emerging (normalisation of utilisation, offshoring and travel costs benefits, higher-than-usual wage hikes), while tailwinds could be limited (pricing, pyramid rationalisation), which could pressure margins in the first half of next fiscal.

  • Maintains revenue assumptions for FY23-24 but cuts margin expectations by 45-50 basis points for FY23-24, partially offset by higher other income due to benefit from hedge book.

  • The stock has corrected recently, but we maintain EW on premium valuations limiting upside potential, making risk-reward balanced.

Nomura

  • Maintains 'neutral' at a target price of Rs 4,320, implying a potential upside of 9.1%.

  • Ebitda margin decline was largely driven by gross margin drop of 60 basis points due to continued strong hiring.

  • Smaller-sized deals outpace the larger ones, and Mindtree continues to benefit from this trend.

  • Prefers Persistent Systems Ltd. over all other mid-cap IT services companies.

Motilal Oswal

  • Maintains 'neutral' at a target price of Rs 4,230, implying a potential upside of 7%.

  • Views continued execution in both revenue growth and profitability as a key positive for the stock. Expects revenue to remain robust and margin to remain stable.

  • The management’s increased focus on annuity revenue and strategic accounts is reflected in its revenue and client mix.

  • A strong outlook on strategic accounts, decent deal signings, and the ability to sustain improved margin are key positives.

  • The stock is currently trading at 28 times FY24 earnings-per-share estimates. As the key positives are already captured, we see limited upside hereafter.

Nirmal Bang

  • Maintains ‘sell’ at a target price of Rs 3,120, implying a potential downside of 21%.

  • Total contract value of around Rs 2,975 crore (Rs 2,861 crore in Q4) reflects the need for pick-up in order inflow, however, Mindtree continues to win a large number of short-cycle digital transformation projects, which later expand into larger engagements due to cross-selling/up-selling.

  • Margins will face pressure in FY23 with opening up of travel and salary hikes planned in FY23.

  • Revenue maximisation mandate gives appetite to ask for higher pricing while cost efficiency mandate suffers from pricing pressures. Mindtree boasts of balancing between these two mandates to create superior customer relationships in the current inflationary environment.

  • However, Nirmal Bang does not think that Tier-2 companies will measure up well on the efficiency side when compared to Tier-1 companies due to weaker automation skills.

  • Aggressive fresher hiring will help in stabilising attrition along with ensuring capacity for a robust demand pipeline.

Yes Securities

  • Maintains ‘add’ at a target price of Rs 4,570, implying a potential upside of 14%.

  • Robust deal booking provides strong revenue visibility. Attrition remains high but expected to stabilise over next six months.

  • Improving employee pyramid, positive operating leverage and the efficiency measures should help to broadly maintain stable margin. High revenue concentration from top clients at 24.9% remains a risk factor.

Prabhudas Lilladher

  • Maintains ‘buy’, cuts target price to Rs 4,778 implying a potential upside of 20.7%.

  • Set to lead on growth front led by strong total contract value, client mining capabilities and strong deal pipeline.

  • Decreased target price factors in increase in risk free rate to 7.2% and moderation in terminal growth rate.

HDFC Securities

  • Maintains ‘add’ with a target price of Rs 4,855, implying a potential upside of 22.6%.

  • Mindtree’s improvement in consistency and predictability (though not fully with disconnect between TCV/growth on short cycle deals) is led by building full-stack account and account mining focus and focus on building partner ecosystem and hyperscale proposition.

  • Despite modest deal booking metrics and continuity of tail rationalisation pointing to growth moderating in FY23, HDFC Securities expects Mindtree to deliver a high-teen growth CAGR, supported by expansion into continental Europe and core portfolio focus, with predictable margins.

Dolat Capital

  • Maintains ‘reduce’ with a target price of Rs 4,150, implying a potential upside of 5%.

  • Although business momentum remains strong, with growth diversity and stable profitability, Dolat thinks most of these gains are well priced in and thus in view of worsening macro conditions, it retains its rating.

  • Expects EBIT margins to decline by 3 basis points towards increased need for business investments and work-from-home normalisation impact.

  • Expects sustained traction in top accounts and improved outlook in BFSI/travel vertical would translate into strong growth in FY23 as well.