ADVERTISEMENT

Mindtree Q3 Review: Shares Slump On Valuation Woes, High Attrition | Analysts' Take

Here’s what brokerages made of Mindtree’s Q3 performance...

<div class="paragraphs"><p>Mindtree campus in Bengaluru, India. (Photographer: Nishant Sharma/BloombergQuint).</p></div>
Mindtree campus in Bengaluru, India. (Photographer: Nishant Sharma/BloombergQuint).

Shares of Mindtree Ltd. fell as analysts remained cautious over its rich valuation and high attrition even as revenue rose and margin beat estimates in the third quarter.

The Bengaluru-based IT company’s revenue rose 6.33% sequentially to Rs 2,750 crore in the quarter ended December, according to its exchange filing. That compares with the Rs 2,744.6-crore consensus estimate of analysts tracked by Bloomberg.

Its EBIT margin expanded 100 basis points over the preceding quarter.

Key Highlights (Consolidated, QoQ)

  • Net profit up 9.68% at Rs 437.5 crore, against the estimated Rs 413 crore.

  • Dollar revenue up 4.7% at $366.4 million.

  • EBIT up 12.60% at Rs 528.9 crore.

  • Margin expanded to 19.2% from 18.2%. Analysts had pegged the metric at 18.3%.

Mindtree’s deal total contract value crossed $1.2 billion in the nine months ended December.

“We have continued our positive revenue momentum through the third quarter of FY22 on the back of robust demand, aggressive customer mining, and end-to-end digital transformation capabilities,” said Debashis Chatterjee, chief executive officer at Mindtree.

Peers such as Tata Consultancy Services Ltd., Infosys Ltd. and Wipro Ltd. saw their revenue and net profit rise sequentially in the third quarter, but margin remained under pressure and attrition inched up. Infosys raised its revenue growth guidance for FY22, while TCS retained its double-digit forecast. Wipro guided for a 2-4% sequential growth.

Shares of the company slumped as much as 5.6%, the most since Dec. 20, to Rs 4,477.25 apiece, before paring some losses to end 4.1% lower.

Of the 43 analysts tracking Mindtree, 14 recommend a ‘buy’, 18 suggest a ‘hold’ and 11 have a ‘sell’ rating, according to Bloomberg data. The average of 12-month price targets implies a downside of 0.2%.

Here’s what brokerages made of Mindtree’s Q3 performance:

Morgan Stanley

  • Maintains ‘equal-weight’ with a target price of Rs 5,100, implying a potential upside of 8%.

  • Growth was broad-based across client buckets and was also supported by growth from the top client, even as management reiterated its revenue diversification strategy.

  • Demand environment is strong, but significant valuation premium to large caps makes risk-reward balanced.

  • Expects Mindtree’s growth momentum to remain strong, but on our above-street EPS forecast, valuation is at a 17% premium to large caps such as TCS.

  • Any near-term volatility in the stock could provide a better entry point given constructive management commentary on demand and margin surprise potential.

Nomura

  • Maintains ‘neutral’, hikes target price from Rs 4,480 to Rs 4,640 apiece, still implying a potential downside of 2.2%.

  • Margin outperformance was the key highlight from Q3 results.

  • Margin defence was strong despite Mindtree grappling with rising attrition (22%) and the company increasing its net headcount by 7% in Q3.

  • Key risks include weakness in travel vertical revenues due to the ongoing pandemic and margin softness due to higher attrition.

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

  • The stock currently trades at 32.7 times the forecasted FY24 earnings per share, and we prefer Infosys in large caps and Mphasis in mid caps.

Dolat Capital

  • Maintains ‘sell’ with a target price of Rs 4,360, implying a potential downside of 8%.

  • Mindtree’s growth commentary remains confident as it is witnessing strong demand driven by client spending on digital transformation across verticals.

  • Deal wins have been moderate in since the last few quarters but revenue growth momentum and commentary remains strong.

  • Attrition has been a challenge for Mindtree, but it plans to tackle this with use of subcontracting and scaling the fresher in-take.

  • Available margin lever of subcontracting and discretionary spends, coupled with increased in-take of fresher, provide us comfort on margin sustenance in FY23 and FY24.

  • Business momentum is strong with growth diversity and stable profitability. However, we think most of these gains are well priced in.

IDBI Capital

  • Maintains ‘hold’ with a target price of Rs 5,000, implying a potential upside of 5%.

  • Mindtree will be a key beneficiary of strong growth in digital technologies and larger tech spending pie over two-three years.

  • However, most of the positives are factored in the stock.

  • IDBI Capital expects the company to witness improvement in retail led by traction consumer experience, legacy modernization in BFSI, growth in top clients in communication, media and technology and improvement in travel & retail.

  • Profitable growth is a key focus area and the company said it will be able to sustain Ebitda margins in a tight band of 20% without compromising on its growth initiatives.

Motilal Oswal

  • Maintains ‘neutral’, hikes target price to Rs 4,880, implying a potential upside of 3%.

  • Fair valuations and relatively higher client concentration (top client accounts for 24% of revenue) are key reasons for the rating, although Mindtree is moving in the right direction.

  • 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. But as they are already captured, we see limited upside hereafter.

Prabhudas Lilladher

  • Maintains ‘buy’, raises target price to Rs 5,249 from Rs 5,141, implying a potential upside of 10.6%.

  • Massive beat in EBIT margin despite supply-side pressures due to higher attrition is impressive.

  • Miss in revenue estimate was led by softness in revenue cycle management as retail clients paused their digital transformation initiatives to focus on peak demand during holiday season. Growth was healthy in the rest of the verticals.

  • Demand continues to be strong with an increasing number of deals coming with a large tail of growth.

  • Attrition may peak out next quarter and stabilize thereafter.

  • Mindtree is one of the few companies which is firing on both the engines - strong sustainable growth and steady increase in margin.

Nirmal Bang

  • Maintains ‘sell’ with a target price of Rs 3,841, implying a potential downside of 19%.

  • The 188% stock return in CY21 versus 60% for Nifty IT indicates that elevated growth expectations have been built into the stock price.

  • Revenue growth performance has fallen short of elevated expectations.

  • Mindtree’s growth continues to be driven by customer experience and data analytics rather than the cloud part and that Nirmal Bang thinks its a unique proposition.

  • While it is too early to predict the impact of the evolving pandemic situation, Mindtree remains confident that its strategy of growing existing relationships, diversity in customer mix and industry partnerships will continue to deliver meaningful results.

  • While Nirmal Bang’s FY23/FY24 estimates are higher than consensus, unlike many of our sell-side peers, we are unwilling to take the target multiple higher as we still think that the business of Mindtree is inferior to that of TCS.