Retain ‘neutral’ on MTCL, 1-year target at Rs 1,550

By: | Published: March 10, 2016 12:50 AM

MindTree Consulting (MTCL) updated its outlook on 4QFY16, now expecting marginal q-o-q organic growth, compared to earlier outlook of bettering 2.3% reported US dollar revenue growth of 3Q.

MindTree Consulting (MTCL) updated its outlook on 4QFY16, now expecting marginal q-o-q organic growth, compared to earlier outlook of bettering 2.3% reported US dollar revenue growth of 3Q. The outlook comes on the back of delays in the commencement of a few projects in Retail & CPG, and BFSI verticals. Weak revenues will also drive sequential decline in margins on organic basis, compared to earlier commentary of margin expansion aided by uptick in revenue growth. Full integration of Magnet360 will compound to the profitability hit during the quarter. Despite this, MTCL expects to significantly exceed the NASSCOM growth estimate of 10.3% in FY16, on an organic basis.

CY15 revenue for Magnet360 was $25 million, 25% y-o-y growth, implying $6.5-7 million revenue in 4QFY16. Our revenue growth estimate of MTCL earlier factored in 7.6% q-o-q (3.4pp from Magnet360 + 4.0pp organic).

The revision in estimates has led to a cut in revenue estimates of FY17/18 by 2.7/2.3%. This consequently drives downward revision in earnings estimate for FY17/18 by 4.7/5.6%. Our one-year forward target price of Rs 1,550 discounts forward EPS by 15x. Maintain Neutral on valuations. MTCL is our preferred business model in tier-II IT.

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