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

The Economic Times - - Smart -

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.

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