With a strong revenue increase and robust EBITDA margin expansion, Mindtree has dodged the supply-side challenges in the January and March quarter, reporting a strong 3.9% on-year growth in profits.
With a strong revenue increase and robust EBITDA margin expansion, Mindtree has dodged the supply-side challenges in the January and March quarter, reporting a strong 3.9% on-year growth in profits. The Information Technology and outsourcing company has also shown some sharp recovery on the stock exchanges this month. Hitting its low in the first week of April, the scrip is now up 25% to trade at Rs 879 apiece on the Nationa Stock Exchange. Although brokerages do see further upside to the scrip, they remain divided on how well it will be able to perform in the coming quarters.
Singing to the same beat, three major brokerage firms — Motilal Oswal, Edelweiss Securities, and HDFC Securities — expect the company’s ability to win large deals to help it tide through the turbulent times. “Mindtree’s expertise in digital solutions and its strong deal-wins should help it outperform peers in these testing times. Besides, execution discipline and focus on delivery should ensure sustained margin recovery,” said analysts at Edelweiss Securities while recommending investors to buy the stock with a target price of Rs 945.
After the ownership disruption that Mindtree witnessed in 2019, the company has been steadily marching towards achieving stability in clients count. Brokerages across the board had already priced in the expected fall in profits owing to Mindtree’s exposure to the travel and hospitality segment, accounting for 16% of the revenue. However, the company’s strong execution in Januar-March quarter, continued growth in the top account, robust deal wins, and confident commentary suggests disruptions are likely to be lower than initial expectations, said Motilal Oswal. The brokerage has revised its target price upwards for Mindtree shares and now expects it to reach a target price of Rs 960. Deal wins for the quarter increased by 43% for Mindtree.
Mindtree’s strong revenue growth was helped by high-tech and media vertical, accounting for 43% of its revenue. HDFC Securities expects Hi-tech & media and retail, CPG, manufacturing verticals to continue their growth into the coming quarters. The brokerage has a target price of Rs 830 on the scrip implying 15x FY22E EPS.
But not everyone is upbeat on the stock. High top client concentration, moderating growth in digital services, and aggressive cost rationalization are being looked at as some areas of concern, when it comes to Mindtree by Aniket Pande, Research Analyst IT, Prabhudas Lilladher. Pande is of the view that this is the right time to trim your investment in the stock. “MTCL (Mindtree) derives 16% of revenues from Travel & Hospitality vertical which will be severely impacted. BFSI (20% of revenues) & Retail- Manufacturing (20% of revenues) will be under pressure in FY21E. We believe ~60% of the total revenues face direct risk from COVID-19.” Pande said.
Prabhudal Lilladher forecasts a revenue decline of 3.4% this fiscal year, followed by a 6% recovery in the following year. “Value MTCL at 12X earnings on FY22E EPS of Rs.57 to arrive at a changed target price of Rs. 680. Stock is currently trading at expensive multiples of 20x/16x on FY21/22E at EPS of Rs. 45/57 respectively,” Pande added.