After IT major Mindtree reported Q1 results below street estimates, analysts note that increased attrition and uncertainty following L&T's hostile takeover weighed on the earnings.
After IT major Mindtree reported Q1 results below street estimates, analysts note that increased attrition and uncertainty following L&T’s hostile takeover weighed on the earnings. Mindtree share price plunged more than 10% to hit the day’s low at Rs 675.05. Notably, Mindtree has reported a 41% drop in net profit to Rs 92.70 crore, from Rs 158.20 crore, as higher expenses weigh. The firm’s revenue rose 11.9% to Rs 1,834.2 crore in the June quarter from Rs 1,639.5 crore in the comparable period previous fiscal.
Taking stock of the reported results, brokerage firm Prabhudas Lilladher noted that uncertainty continues to weigh on the multiples. “We did see a strong spike in attrition in Q1FY20 also. Attrition was 7 quarter high at 15.1% (+90bps QoQ, +290bps YoY). This quarter MTCL did showed a strong TCV of US$ 324mn (+34% QoQ, 6% YoY) but new deal momentum declined by 10% QoQ to US$76mn. We believe rise in attrition can put execution risk to the TCV,” the firm noted. Prabhudas Lilladher has a ‘Reduce’ rating on the shares with a target price of Rs 755.
Global brokerage firm BNP Paribas said that Midtree has lowered its outlook in FY20 to factor in the uncertainty going forward. Notably, L&T is now the promoter of the IT firm with a 60.6% stake. “We believe L&T will take some time to appoint a new senior management team and get margin back on track. Until we see further clarity on these developments, and stability in terms of personnel and attrition, the stock is likely to trend flat-to-downwards, in our view,” Reliance Securities said in a note. The research firm has a hold rating on the shares with a target of Rs 740.
According to Prabhudas Lilladher, the choice of new CEO will not be easy to attract high profile talent if the plan
is for an eventual merger with LTI. “We also note that clients could may held back decisions or started with much smaller engagements due the uncertainty driven by the hostile acquisition process which we already saw in contraction of new deal wins,” said the firm further. Meanwhile, L&T’s Managing Director (MD) & Chief Executive Officer (CEO) SN Subrahmanyan said that Mindtree is not being snatched but has come under a bigger tree called L&T. “We have already stated that Mindtree will be run and traded under the same name. What will happen in the future that I can’t predict. We have three IT companies out of which two are listed. This will be the fourth one and it will continue to be like that,” SN Subrahmanyan added.
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