Mindtree stock on the rise as company reports highest-ever deal wins

The company reported its highest-ever deal wins at $393 million for the quarter and $1.3 billion for FY20

The Mindtree stock was up 13 per cent on the back of strong March quarter results, a robust deal pipeline, and expectations of healthy margins in 2020-21. In addition to its results, one of the triggers has been the management commentary — which was more optimistic compared to the firm’s bigger peers — on its deal pipeline, along with room for margin expansion.

The firm reported its highest-ever deal wins at $393 million for the quarter, and $1.3 billion for 2019-20. This was aided by a five-year deal with Realogy, a real estate services provider in the US. The strong deal wins (up 46 per cent compared to the four-quarter average), coupled with steady volumes and margins surprised the Street. Verticals such as hi-tech and media, which account for 43 per cent of revenues, led the growth in the March quarter, registering an uptick of 5 per cent on a sequential basis.

Despite the tough environment, the company reported a 250 basis points (bps) sequential improvement in operating profit margins to 18.1 per cent, led by operational efficiencies and rupee depreciation. Analysts at HDFC Securities indicate the gains are sustainable, following the strong recovery seen over the past three quarters which led to overall margins improvement of 480 bps. In addition to rationalisation of clients, optimal sub-contracting and offshore mix/utilisation are the other profitability levers.

 

 

There are, however, two key risks that investors should not ignore. One is the firm’s high dependence on 

revenues from its top client Microsoft, which accounts for 25 per cent of its turnover. Mindtree’s growth in the quarter was entirely driven by its top client, which added $5.5 million to incremental revenues, 
 

offsetting $2.3-million decline in the rest of the firm, say analysts at Kotak Institutional Equities. Exposure to travel and hospitality, which accounts for 16 per cent of revenues, is the other risk, as clients in the vertical are conserving cash and cutting back on discretionary spends. 

Analysts expect a sharp decline for the vertical in the June quarter and say that it could take time to recover, as companies and consumers work from home and avoid travel.

At the current price, the stock is trading at 19.6 times its FY21 earnings estimates. The premium to its mid-cap peers is justified, say analysts, given growth visibility and margin gains.