New deals, demand growth across verticals are positives for Mindtree stock

Current contract pipeline, as well as demand growth across verticals, are positives for the company

The stock of IT services company Mindtree has been underperforming its peer index in the recent past, given the overhang of the promoter stake sale. 

While there could be short-term volatility, the Street will focus on growth outlook driven by deal wins and customer additions, going ahead. 

While deal momentum has been strong with key verticals such as retail, travel, technology, and media expected to do well, the company has to generate consistent growth if it seeks to match the premium of larger mid-cap peers. 

In the September quarter results, there was a sharp moderation in revenue growth in constant currency terms of 2.4 per cent, as compared to 8.2 per cent in the June quarter. 

Revenues from retail and consumer packaged group were down 4.2 per cent on a sequential basis on account of the completion of certain projects in Europe. While there is seasonality, the company has guided for similar growth (as in Q2) in the December quarter.

One of the worries for the Street is that the top account accounts for 20 per cent of overall revenues and analysts expect that it would account for over 41 per cent of incremental revenues for FY19. 

Despite the disappointment in the September quarter and client concentration, brokerages believe that the company should be able to achieve a robust 18 per cent dollar revenue growth in the current financial year. 

Estimates for FY20 growth, too, are strong at 15 per cent. This will led by larger deals, stable top accounts and traction in the digital space which at 48 per cent of revenues is the highest among IT peers. Total contract value in Q2 though lower than the previous two quarters is nevertheless strong at $271 million.  In addition to the rupee, automation, higher utilisation should help the company improve its margins. 

In addition to the rupee, automation, higher utilisation should help the company improve its margins. 

Though profitability improved by 130 basis points on a sequential basis in the September quarter to 15.4 per cent, they were below estimates. 

Analysts expect a marginal uptick of the same in the current quarter.