Mindtree slips 3% post Q2 nos; should you buy? Here's what brokerages say

It reported 34.6 per cent decline in its net profit at Rs 135 crore for the second quarter of FY20 when compared with the corresponding period of the previous financial year.

Shares of Mindtree slipped as much as 3.13 per cent to Rs 720 apiece on the BSE in the intra-day deals on Thursday after the company reported 34.6 per cent decline in its net profit at Rs 135 crore for the second quarter of FY20 when compared with the corresponding period of the previous financial year.

At 11:10 am, the stock was trading at Rs 724.50 per share, down over 2.53 per cent on the BSE. In comparison, the S&P BSE Sensex was ruling at 38,640.34, up 41.35 points or 0.11 per cent.

The decline in net profit was attributed to higher expenses arising out of payout to employees apart from absence of gains from currency movement, which it reported in Q2 of FY19. In sequential terms, however, net profit grew by 46 per cent.

The Bengaluru-based firm, which announced its earnings for the first time after L&T took majority control in the company, posted a profit before tax (PBT) of Rs 183.4 crore, a rise of 45 per cent in sequential terms. The company said it didn’t avail the new corporation tax rates as it is still operating in tax holiday zones. READ MORE

From the investment point of view, brokerages appear divided on the stock. While some believe Mindtree is firmly set to clock robust growth going forward and the current management has the requisite capability to firmly place the company on the growth path, others see continued downside risk driven by company-specific challenges such as ownership changes and industry-wide moderation in client spending and emerging trends. 

As per Edelweiss Securities, Mindtree reported a resilient set of Q2FY20 numbers. While 2.7 per cent QoQ USD revenue growth beat Street’s 2.6 per cent estimate, the 40 basis points (bps) QoQ adjusted EBITDA margin jump to 13 per cent surpassed their 12.9 per cent estimate. 

"We are enthused by the new management’s capability and believe Mindtree is firmly set to clock robust growth going forward. Led by the strong revenue momentum, despite corporate upheavals, we revise up FY20/FY21E revenue 3.5/4.8 per cent. The stock is trading at 19.7x FY20E earnings per share (EPS). Retain ‘BUY’ with revised target price of Rs 853 (Rs 824 earlier) as we roll over to Q4FY21E," the brokerage said in a results review note. 

Analysts at Motilal Oswal believe given the healthy pipeline and the ramping of projects on schedule, revenue growth is likely to remain above industry average but margin improvement is likely to be slower-than-anticipated earlier. Reason -  limited margins support from utilisation which is already at peak levels and Pyramid rationalisation and the change in effort mix are seen to benefit only gradually. 

The brokerage has cut the EBIT (earnings before interest and tax) margin estimate by 120bp/30bp for FY20/21 after Q2 profit miss; however, revenue estimates are largely unchanged. "Over FY19-21, we expect constant currency (CC) revenue CAGR of 10.8 per cent and earnings CAGR of 2.1 per cent. Mindtree trades at 19.3/16x FY20/21E earnings. Our revised target price of Rs 750 discounts forward earnings by 15x (v/s 16x earlier) amid concerns about profitability and leadership transition. Maintain 

Neutral," it said.

On the contrary, Emkay Global Financial Services maintains 'sell' rating on the stock. The brokerage continues to see downside risks to its ‘below-consensus’ FY20/21E EPS of Rs 32.9/43.5, "driven by company-specific challenges (ownership changes driving a significant churn in senior/mid-level management); and industry-wide moderation in client spending and emerging trends, which in our view, favors players with scale."

It has set the target price of Rs 680.