Valuations under pressure as Street seeks management stability in Mindtree

Though a good response to L&T’s open offer for Mindtree supported the stock in recent days, the management transition could lead to near-term uncertainty and impact growth outlook. According to analysts, there could be near-term pressure on the stock as the Street comes to terms with the FY20 outlook. At 16 times FY21 estimated earnings, the stock currently trades at a 16 per cent discount to its last five-year average valuation.
 
According to Anand Rathi Research, the top-10 accounts were being managed by the co-founders (Partha D Sarkar, Rostow Ravanan and Krishnakumar Natarajan). With changes in the management, it is possible that the top accounts may be affected.
 
Amit Chandra, analyst at HDFC Securities, echoes similar views. "Most likely attrition at the top level could result in indecisions and some slowdown in revenue growth from top clients," he said. 
 
The management transition process would also weigh on the company’s new client additions and overall operations, further denting its near-term growth. A 4-5 per cent revenue contribution from new clients conveys the incremental growth challenges that the company will face.
 

Some data points such as deal wins and attrition rates reported during the March 2019 quarter results were pointers to the impact on Mindtree due to the hostile takeover from L&T. While deal wins in the March quarter fell 19 per cent year-on-year to $242 million, attrition rate stood at 14.2 per cent, which was highest since the March 2017 quarter.
 
In fact, the loss to the business could be sharper for Mindtree given the macro headwinds, making low-teen growth target for FY20 (as per annual report FY19) difficult. Client spending in key geographies – the US and the UK -- for Indian IT companies is slowing down mainly due to trade uncertainty. These two regions account for over 90 per cent of Mindtree’s revenue. Further, rupee behaviour is also not supportive of the sector. Analysts expect net profit to decline in FY20 after a sharp 32 per cent growth in FY19.