Mindtree ticks double-digit growth to ride on strong deal pipeline

Mindtree ticked most of the boxes in its March quarter (Q4) results — like its large-cap peers — with robust revenue growth, steady margins, and a healthy deal pipeline.
 
After a muted first half (H1FY21), the company posted growth in excess of 5 per cent for the second consecutive quarter. Its 5.2-per-cent revenue growth in dollar terms was driven by growth across verticals, barring the banking and financial services space. 
 
Communications, technology, and media, which account for about half its revenues, grew 4 per cent. Sectors impacted the most by the pandemic like travel, manufacturing, retail, and hospitality saw recovery on a sequential basis, posting healthy growth of 9-17 per cent. These sectors account for a third of Mindtree’s revenues.  
 
After a strong finish to FY21, the key trigger for the stock would be the growth metrics the company will deliver in FY22. While the deal pipeline increased by 20 per cent on a sequential basis to $375 million in the quarter, the company’s order book was up 12 per cent year-on-year in FY21.
 
Analysts at HDFC Securities say: “Although the total contract value in FY21 was higher by 12 per cent, its robust pipeline — which is at an all-time high — and expectation of strong closures in H1FY22 will support 16 per cent growth in FY22.”

 
They expect growth acceleration to be led by the European region, along with an uptick in smaller accounts.
 
The margin trajectory is another key metric the Street will keep an eye out for. The company posted a 119-basis-point sequential decline in operating profit margins during the quarter, to 21.9 per cent. The dip was largely on account of wage hikes and adverse forex movement, though it was partially offset by revenue growth performance and operational efficiencies.
 
While the management believes there will be margin headwinds on account of wage hikes, investments, lower utilisation, and costs coming back, it is confident of margins staying above the 20-per-cent level. This will be led by pyramid rationalisation (keeping wage costs lower), fixed price contracts, revenue growth, and operational efficiencies.
 
 Most brokerages are positive on the company as they believe the mid-tier IT major will sustain its double-digit growth momentum. This, coupled with a healthy margin profile and good execution, should ensure strong earnings growth.
 
At the current price, the stock is trading at 23x its FY23 estimated earnings. Given the prospects, investors may add the company to their portfolios on dips.