Margin gains help Mindtree find its feet in Q3, new contracts a concern

Slow pace of new contracts remains a concern despite revenue growth

After underperforming significantly on the growth and margin fronts in the September quarter, Mindtree put up a better-than-expected show in the December quarter. 

It posted a 1.5 per cent sequential dollar revenue growth, led by a strong uptick from its top clients, and thus helped address concerns on client attrition amid a management transition.  

The increase in share of revenues from project-based contracts to fixed-priced ones is another positive. The share of fixed-priced contracts increased by 280 basis points sequentially to 59 per cent, in line with the company’s strategy to move towards annuity-type revenues. 

In addition to revenue growth, the firm’s operating profit margins, too, came in better than what the Street had estimated. 

This was aided by large deals and stable contract pricing.  Earnings before interest and tax (Ebit) margins, which had dipped to 6.4 per cent in the June quarter of FY20, rose 276 bps year-on-year to 12 per cent in the December quarter, driven by cost optimisation, increase in fixed-price contracts, and a falling proportion of low-margin accounts. 

The company indicated that margins would continue expanding on higher utilisation, offshoring, and lower sales and general administration expenditure. The firm also stuck to its revenue guidance for the current financial year, at 8-9 per cent.

Compiled by BS Research Bureau

Among key concerns is the slowing pace of new contracts. These declined 19 per cent over the year-ago quarter to $207 million, as clients have been deferring decisions. 

The renewal part of the order inflow has been declining over the last three quarters, which could impact revenue visibility, according to analysts at Nirmal Bang Research. 

Muted revenue growth at 2 per cent in the digital segment  is worrying, given that larger peers such as Infosys have posted better growth rates. 

Digital revenue, which accounts for 38 per cent of overall revenues, is at similar levels to the one reported in the June 2019 quarter. 

While improvements in margins were positive — helping the stock gain close to 2.8 per cent on Wednesday — 

further gains could be capped, keeping in mind the sharp stock price movement since the start of December.