Strong order intake of $324 million reflecting a book-to-bill ratio of 1.23x should drive pick-up in revenue growth from Q2 with Mindtree now expecting to grow faster than industry average in FY20 vs earlier guidance for growth in low teens.
Mindtree’s margins were materially lower than expected in Q1FY20 even adjusted for the 260 basis points one-time impact from special reward given to employees for the 20th year anniversary as well as 120 bps one-time impact on account of higher transition costs and legal expenses. Ebitda margins are now expected to be flattish year-on-year in FY20 adjusted for currency and the impact of one-time costs in Q1FY20.
But given the 150 bps benefit to Ebitda margin on account of IndAS-116 implementation, on a like-to-like basis, it is now expected to drop by 150 bps in FY20 vs earlier expectation for a 100-120 bps rise. Strong order intake of $324 million reflecting a book-to-bill ratio of 1.23x should drive pick-up in revenue growth from Q2 with Mindtree now expecting to grow faster than industry average in FY20 vs earlier guidance for growth in low teens. We remain ‘unrated’ till clarity emerges on the new leadership and management structure.
Overall revenue rose by 1.1% q-o-q and 10.3% y-o-y in CC terms in Q1FY20. Revenue growth was healthy at the top-5 customers at 2.1% q-o-q in dollar terms with weakness driven by top 6-10 clients which witnessed a revenue drop of 2.3% q-o-q in the quarter. Despite the organisational disruption given the L&T offer, order intake in Q1FY20 was healthy at $324 million, reflecting a book-to-bill ratio of 1.23x. Mindtree expects Ebitda margins in FY20 to be flattish y-o-y adjusted for 1) changes in currency, and 2) impact of one-time costs in Q1FY20.
Given the strong deal intake and reassuring management commentary, we expect revenues to rise by 10.4% in FY20 with Ebitda margin expected to be 13.5% (14.8% adjusted for one-off costs in Q1FY20) vs 15.2% in FY19. Mindtree is trading at 20.3x and 15.5x our FY20 and FY21 EPS estimates, respectively. We are ‘unrated’ on the stock for now till clarity emerges on the new leadership and their strategic vision.