Consistent revenue growth to remain key for Mindtree stock: Experts

Its ability to support current margin may support the valuation

The Mindtree stock was one of the biggest losers among mid-cap IT companies, shedding nearly 7 per cent in trade on Friday. The dip in stock value was due to lower-than-expected revenue performance in the September quarter, weak deal wins, and higher exposure to Covid-19-hit verticals. 

Though dollar revenue growth of 3.1 per cent on a sequential basis in the quarter was broad-based, it was lower than Street estimates. Growth from the top client was muted after three quarters of robust revenue performance. While the company is confident of growth from the client to come back in the coming quarters, given the Q2 performance, brokerages believe a consistent growth and client concentration will remain key worries. 

Analysts at Emkay Research say: “Mindtree’s revenue performance remained skewed, with the top client driving a large part of the incremental revenues. We expect a steady performance in the top client, however, increased concentration (about 30 per cent of revenues) and growth dependency remain a cause of concern.”

While growth in the travel vertical in Q2 at 5.6 per cent on a sequential basis was better after the sharp 54 per cent sequential decline in Q1, the headwinds for the vertical due to Covid-19 would remain over the next few quarters. The travel, transport and hospitality vertical is one of the four focus verticals of Mindtree and its revenue contribution at 8.3 has dropped to less than half, as compared to year-ago levels. 

While the Street will keep an eye out for revenue growth, as well as deal wins in the seasonally weak December quarter, maintaining profitability after a strong September quarter margin performance could be a bigger trigger. The Ebit margin at 16.7 per cent in Q2 was 160 basis points higher on a sequential basis and 740 basis points over the year-ago level, way ahead of Street estimates. The management is confident of maintaining margins at 16.7 per cent despite wage hikes in the second half of FY21. 

While the stock shed 11 per cent over the last week, it had doubled in value over the last six months and given near-term uncertainty, investors should await consistency on the revenue growth front before taking an exposure to the stock.