Digital Focus, Acquisitions Help Mindtree to Bounce Back Smartly
Strong Q4, FY16 earnings, increased contract value and revenue visibility make the mid-tier IT company attractive for long-term investors
ET Intelligence Group: Between March 4 and March 29, Mindtree’s stock lost over 22.5% despite a gradual recovery in the broader market. The sharp fall was on account of slower earnings growth projection by the company’s management for the March quarter. Since then, however, investors have started showing a renewed interest in the stock, which has gained 12% since April 1. This is largely due to its beaten down valuation and a hope that the deceleration anticipated by the management would be short term.
Their belief was vindicated on Monday when the Bengaluru-based mid-tier software exporter reported a stellar revenue growth for the March 2016 quarter as well as FY16. Revenue grew 6.1% sequentially to $195.6 millionintheMarchquarterand22.5%to $ 715.2 million in FY16. While the strong growth during FY16 was supported by four acquisitions, it was still impressive at 15.4% excluding the inorganic growth. This was also higher than the industry body Nasscom’s estimate of 11-13% growth for the industry.
What’s working for Mindtree is its focus on the digital technologies grouped under SMAC, which comprises of social media, mobility, analytics and cloud computing. The company was an early adopter of these platforms, which now contribute nearly 39% to revenue. In FY16, this revenue stream increased by 37.6%. It has strengthened the digital offerings through four acquisitions over the past year — the recent one was that of Magnet 360 in January for a total consideration of $50 million (about ₹ 335 crore).
The total contract value (TCV) of orders bagged, which indicates trac- tion in business, was $281 million in the March quarter compared with $204 million in the previous quarter. Most of these contracts will be executed in one year, which gives revenue visibility for the medium term.
The employee metrics is also showing improvement. Attrition lowered to 15.7% from 18.2% a year ago. In the coming quarters, the employee utilisation is expected to improve from the current level of 69.4% given the order flow. This may also help in improving operating margin, which fell by 220 basis points to 14.9% in FY16.
At Monday’s closing price of ₹ 731.4, Mindtree’s trailing price-earnings (P/E) multiple works out to be 20.3. Considering 20% growth in the rupee-denominated revenue for FY17, which is a conservative estimate when compared with 31.7% growth in FY16 and net margin of 13%, the forward P/E is 16.8. This may look attractive to long term investors.