MindTree Q3 result: Deal wins, strong traction in digital are main triggers

The MindTree stock has gained 21 per cent in two trading sessions, riding on strong December quarter (Q3) results, robust revenue visibility and improved margin outlook. These have led analysts to revise upwards their earnings estimates for FY19 and FY20. 

The outperformance in Q3 comes after a muted show in the past, which was dragged down by two acquisitions and higher costs. The company had cut its revenue forecast earlier to a high single-digit from a low double-digit growth in FY18. 

However, after the muted performance over the past three quarters with an average revenue growth of 2.4 per cent, the company posted a growth of four per cent in Q3. This was above analyst estimates of 2.5 per cent. A six per cent growth in realisations and large projects getting into a steady state revenue phase helped post the sequential uptick in revenues.

Analysts at Motilal Oswal Securities said the continued strength in deal wins, high visibility in top accounts and a strong exit rate (expectations of continued momentum in Q4) would ensure acceleration from an estimated eight per cent revenue growth in FY18 to 12.6 per cent in FY19.

In addition to revenue growth, margins, too, have outperformed on the back of better pricing, cost optimisation and no one-time costs as was the case in the September quarter. Margins came in at 15.1 per cent in Q3, up 350 basis points compared to the September quarter. Better operational performance coupled with a tax reversal also helped it post a better-than-expected net profit. 

Analysts say there is a scope for further improvement in margins driven by a higher employee utilisation, change in onsite-offshore business mix and as synergies from its two acquisitions add to the company’s profitability.

Digital now accounts for 44 per cent of revenues and is increasing along with deal sizes in the segment. 

The company won its largest digital deal in the December quarter. Given the sharp run-up in its price, the stock is trading at 20 times its FY19 estimates. Despite the buy recommendations from brokerages, investors should await for corrections before an exposure to the stock.