HOLD Mindtree - Lacklustre performance but expectations more realistic: AnandRathi Institutional Research

Mindtree - Lacklustre performance but expectations more realistic: Hold

With revenue growth of just 1.7% qoq, primarily due to weakness in the top 2-5 clients, Mindtree had a soft quarter. Lower revenues also led to a 196bp qoq margin erosion. Our earlier notesstated that we are concerned about the high proportion of short-term business adding to volatility, but valuations have now turned favourable (stock corrected 16% and 4% in L3M and L12M), leading to a rating upgrade to a Hold.

Dollar $ revenue up 1.7% qoq. With revenue of $199m (up 1.7% qoq, 28.5% yoy), Mindtree reported a weak Q1. Growth in constant currency was 1.1% qoq, driven by 2.4% qoq volume growth and a pricing declining ~1.3%. Bluefin Solutions contributed $9.5m, down 10% qoq and creating a revenue shortfall of $1m. Mindtree experienced delays in project ramp-ups, pricing pressure on renewals, weak Europe sales, and top-client issues. Of the verticals, Travel declined 6.9%qoq;other verticals grew sequentially.

EBITDA margin dips 196bps qoq. The quarter's EBITDA margin came at 14.7% (down 196bps qoq, 241bps yoy), despite Q1being a no-wage-hike quarter for the company. The prime reasons for margin erosion were losses from Bluefin (80bps impact on consolidated margins), visa costs (100bps), and currency (20bps). Bluefin, while maintaining a healthy deal pipeline, failed to replenish the orders that were executed during the quarter. The reduction (net) of ~513 employees took us by surprise.

Business outlook for FY17. Mindtree expects a soft Q2 as well, with revenue growth expected to be similar to Q1. It also faces margin headwinds of 200bps on account of salary hikes but expects to offset that with the one-offs mentioned above. For FY17, Mindtree reiterated over 15% growth, including acquisitions (just 2% CQGR needed). Margins will be subdued for the year but will improve in H2 FY17 from H1.

Valuation.We are reducing our FY18e earnings and target by ~8% while continuing to value Mindtree at 16x FY18e EPS.Risks. Acquisition-related.

Shares of MINDTREE LTD. was last trading in BSE at Rs.577.15 as compared to the previous close of Rs. 582.15. The total number of shares traded during the day was 27069 in over 1283 trades.

The stock hit an intraday high of Rs. 584.95 and intraday low of 573.4. The net turnover during the day was Rs. 15601882.

Source : Equity Bulls

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