Q3 results: Is Mindtree out of the woods?

Mindtree has reported a steady performance for the December quarter after three successive quarters of struggles


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Mindtree Ltd reported a steady performance for the December quarter after three successive quarters of struggles. The firm had issued profit warnings in two of the first three quarters of the year, and the stock has corrected by nearly 40% since mid-January 2016.

Revenue rose 0.4% sequentially in constant currency terms and fell 0.4% in dollar terms, which suggests Mindtree isn’t exactly out of the woods. Even so, unlike the previous two quarters when revenue declined, it was more or less flat in the December quarter.

Besides, order booking was strong at $314 million, an all-time high for the company. And operating profit margin improved by 90 basis points to 13.4%, higher than analysts’ expectations. A basis point is one-hundredth of a percentage point.

But there were still a number of signs of trouble. Revenues from the top 10 clients fell 1% sequentially in dollar terms.

“Management indicated that growth pick-up would now be pushed out to 1QFY18. We marginally reduce our FY17/18 USD revenue estimates by 1%/2% to factor these in,” analysts at JM Financial Institutional Equities wrote in a note to clients.

They added that the management’s commentary about recovery in growth is likely to cap incremental rerating in the stock.

After a sharp underperformance between mid-January and mid-October 2016, Mindtree shares have been more or less flat in the past three months. The December-quarter results show that while things haven’t deteriorated materially, they haven’t improved either. The high amount of deal wins highlight the company’s strong customer relationships and provide a glimmer of hope.

Investors, however, are likely to wait and look for clear signs of improvement in performance. Especially so, since Mindtree shares trade at 14 times estimated earnings for fiscal year 2017-18, based on JM Financial’s estimates. “The stock’s rich valuations are in-line with tier-1 companies and remain at odds with the uninspiring near-term outlook,” say the brokerage firm’s analysts.

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