Robust deal wins may help Mindtree sustain growth

Ability to maintain margins, high valuation could limit stock upside

IT services firm Mindtree reported a strong revenue performance in a seasonally weak third quarter (Q3). The Bengaluru-based company’s revenue came in higher than the Street’s estimates at ~2,023.7 crore, translating to a 5.1 per cent growth sequentially. It was aided by sustained demand momentum and broad-based recovery across verticals.

Analysts were factoring in a mild correction in operating margins as some cost benefits accrued over the first half of the year from travel and wages were expected to reverse. However, the company surprised the Street with margins expanding by more than 300 basis points sequentially to decadal highs of 19.6 per cent, driven by high utilisation and better offshore mix.

Moreover, the company reported that it added eight new clients in the quarter and the total contract value stood at $312 million, 3 per cent higher than Q2. For the nine months ended December, the company’s overall order book surpassed $1 billion mark and the management commentary on outlook and deal pipeline remains positive.

“We are witnessing strong business momentum across all verticals with a significant demand for cloud, data, and analytics capabilities. We continue to capitalise on the evolving market dynamics with solutions that help enterprises navigate the new normal and grow their businesses,” said Debashis Chatterjee, chief executive officer and managing director, Mindtree.

The company had outlined its new “4x4x4” strategy last month focused on winning large deals, mining strategic accounts, seamless delivery, strengthening its partner ecosystem and targeting mergers and acquisitions. This is in line with its intention to deliver best-inclass growth.

That said, a key concern, according to analysts, is the company’s high reliance on large clients – accounting for nearly 29 per cent of overall revenues – and its exposure to travel, transport, and hospitality sectors, which are among the worst hit by Covid-19.

Shares of Mindtree have nearly doubled in the past year and are among the best performing mid-cap IT stocks. The sharp surge in share price has seen valuations spike with most analysts seeing limited upside from current levels. “At a 12month forward P/E of 23.2x, the stock trades one standard deviation above its historical mean over the last 1213 years, we remain equal-weight,” Morgan Stanley said in a note.