BackMindtree: Reasonable expectations wouldn’t need profit warnings
Analysts expected strong growth in a seasonally strong June quarter. But Mindtree disappointed with a mere 1.7% sequential growth in dollar revenue
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Since early March, Mindtree Ltd has lost 35% in market value, far higher than the 5.5% drop in the Nifty IT index. For three successive quarters now, the company has been on a rocky road. The recent profit warning by the firm is just the latest in a series of troubles it has faced.
In the March quarter, too, Mindtree had issued a profit warning, citing delays in project starts in the retail, and banking and financial services segments. As it turned out, things weren’t as bad as feared—the company ended up reporting a 3.6% sequential growth in organic revenue. However, the episode raised concerns about the management’s credibility.
Analysts expected strong growth in a seasonally strong June quarter. But Mindtree disappointed with a mere 1.7% sequential growth in dollar revenue.
The company has now said the September quarter will be hit because of “cross-currency movements, project cancellations and slower ramp-ups in a few large clients across different verticals and continued weakness in its UK-based subsidiary Bluefin".
These are one too many misses in execution, and investors are understandably disgruntled. Since the June quarter results, analysts at Religare Capital Markets Ltd have cut Mindtree’s earnings estimates by 28-30%. More importantly, they have reduced their target price-earnings multiple by about 20%.
“The new leadership needs to deliver consistent execution to sustain the premium valuations seen over last three years," they said in a note to clients on 2 September.
Another area Mindtree’s management needs to work on is on setting expectations. Analysts point out that it was evident after the June quarter miss itself that the margin guidance for the year was far too ambitious. But back then, the company sounded confident about achieving profit margins of more than 15%.
Now, even though Mindtree has guided for a decline in revenues in the September quarter, it remains confident about beating industry growth rates for the full year. The drop in its stock this year suggests hardly anyone shares the company’s optimism.
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