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Mindtree Ltd impressed the street with better-than-expected performance in the March quarter. It reported consistent sequential growth in foreign exchange earnings of 1.9% and an expansion of 150 basis points in operating profit margins. With much higher growth than their larger peers, investors raised shares by 13% on Monday.
Volume growth was strong at 4.1% and won projects worth $ 393 million, the highest in recent quarters. “The March 2020 quarter of Mindtree surprised positively in margin performance, with adjusted Ebit margins improving to 14.8%, reflecting disciplined execution under the new leadership in H2FY20 and aided by reduced sales, general management staff (expenses) too, “said Emkay Global Financial Services Ltd. Ebit is earnings before interest and taxes.
A notable part of the company’s business (16% of revenue) comes from travel and hospitality, which is greatly affected by covid-19. Revenue from other segments (retail, consumer packaging products, manufacturing and financial services) also decreased sequentially.
However, the impact was more than offset by high-tech and media, whose contribution to total revenue grew from less than 40% a year ago to 43% in the fourth quarter.
Growth is led by the largest customer, which generates nearly a quarter of its revenue, up from 19.8% in the March quarter of 2019, generating a large portion of the incremental revenue.
Mindtree’s high reliance on a single client was seen as a drawback. It makes the company susceptible to budget and price cuts. However, the big client is proving to be a strength in these uncertain times.
“Within the main customer, the company indicated that it is well diversified in areas such as analytics, networking, customer / technical support and marketing operations,” Motilal Oswal Financial Services Ltd said in a note. “As covid-19 is expected to drive the strong adoption of collaboration tools, management believes that its main customer and the company are in an advantageous position.”
Management sees a slowdown in demand in the short term. A large client is improving performance, but there is concern that another large client will reduce performance. Investors should therefore lower their expectations a bit.
Margins are also projected to smooth in the short term. However, management expects profit margins for fiscal year 21 to be better than fiscal year 20, a projection few IT firms have made so far. “Mindtree expects short-term margins to be affected due to falling utilization. However, the company aims to mitigate these pressures by reducing outsourcing costs and pyramid rationalization. In the long term, Mindtree aims to be in the 17-18% band, “ICICI Direct Research said in a note.
Overall, Mindtree performed much better than Street’s expectations. The revenue path and performance of the primary customer remain the key focus areas.
