Consistent growth, margins in Q1 keep Mindtree ahead of larger peers

Mid-tier information technology (IT) major Mindtree’s June quarter performance was ahead of the Street expectations across all parametres with the margin show bucking the overall trend in the IT sector.

Even as its larger peers TCS and HCL Tech and L&T Infotech reported a 40-260 basis points margin fall as compared to the year ago quarter, and on a sequential basis, Mindtree’s profitability was up 20-140 basis points. The company also remains confident of maintaining its operating profit margin despite attrition and supply side pressures at around the 20 per cent mark going ahead.

Some of the pressures for the company came from higher visa costs which were up 50 basis points and one-time merger expenses which impacted margins by 60 basis points. Adjusted for the merger costs, margins were higher by 10 basis points. The headwinds were offset by gains on the forex front and operational efficiencies at 70 basis points and 50 basis points, respectively.

“Some measures like pruning the long tail of accounts, focusing on top 100 accounts which make up for 90 per cent of revenues and increasing the share of annuity projects have been consistently helping the company improve its margins,” Abhishek Bhandari and Krish Beriwal of Nomura Research, said.

Most brokerages expect the company to end the current financial year (FY23) with operating profit margins around the FY22 levels of 20.9 per cent. They also increased their earnings estimates for FY23 to factor in the better margin performance and expectations.

In addition to margins, what stood out was another best-in-class topline performance. HDFC Securities points out that the sequential growth of 5.5 per cent in constant currency terms was the sixth consecutive quarter of over 5 per cent growth. Barring the retail vertical which slipped 9 per cent sequentially, all verticals contributed to the revenue growth performance. The company also announced record deal wins of $570 million in the quarter (Q1FY23) which was up 13 per cent year-on-year.

Given the strong commentary across verticals, deal pipeline and deal wins in Q1FY23, Motilal Oswal Research expects the company to deliver strong revenue growth in FY23 despite a moderation in the second half. Analysts at the brokerage expect the company to deliver a 17 per cent dollar revenue growth annually between FY22-24.

Despite the strong show, upward revision in earnings and robust outlook, the stock slid about 4 per cent in trade on Thursday tracking the weakness in IT stocks with Nifty IT falling 1.6 per cent. While brokerages have raised FY23 estimates marginally, some such as JM Financial have cut their FY24/FY25 estimates by 2-3 per cent given macro volatility. Outsourcing advisory firm ISG had recently lowered its global-managed services and as-a-service annual contract value growth for 2022 to account for macro risks.

Fair valuations and lower target multiple of the merged entity (Mindtree and L&T Infotech) too has weighed on the two companies with the stock of latter too down 3.5 per cent. While long term prospects seem bright, given the macro concerns and impending merger, investors should await progress/clarity on the same before considering the stock.