Mindtree (MTCL) delivered a material negative surprise in Q1FY17. We had earlier downgraded the stock to ADD due to moderation in growth at top 10 clients in H1.
However, 1Q revenue growth was below our moderated estimate (1.1% cc (quarter-on-quarter) vs. our 2.5%). Ebitda margins, a bigger negative surprise, fell 200bps q-o-q vs. our estimate of 30bps decline. Losses at one of its recent acquisitions, visa costs, and instances of pricing pressure were the key headwinds.
Commentary indicates deferrals, likely lower discretionary spends, and a general sense of uncertainty. Although management remained confident of growth improving in H2FY17 (material acceleration unlikely in Q2), we believe it is a tough ask in such an environment. FY17 margin outlook (stable y-o-y) seems aggressive since it implies a sharp 500bps improvement in H2FY17. We are cutting our estimates for FY17 margins by 190bps and for revenue growth by 0.7ppt.
The resultant cut in FY17/18 EPS is 10-12%. Our new target price of R607 is based on 14.5x FY18ii PER.
MTCL’s Q1FY17 revenue growth of 1.1% (cc, q-o-q) was lower than our estimate of 2.5%. Lower revenues from a recent acquisition (BlueFin) were a material headwind in Q1FY17. Commentary indicates that deferment of projects by some of its major clients had affected BlueFin. Revenue of the core business (excluding FY16 acquisitions of BlueFin, Magnet 360, and RSI) grew 1.8% (cc,q-o-q).