Graphic: Mint
Graphic: Mint

Mindtree shows signs of a recovery

While Mindtree shares have fallen 44.3% since it issued a profit warning for March quarter, its better-than-expected Q4 results should come as a relief to investors

Mindtree Ltd’s shares have fallen 44.3% since it issued a profit warning for the March quarter. Growth at the company has taken a tumble since then, owing to delays in project starts and troubles at its UK subsidiary Bluefin Solutions.

In this backdrop, it may come as a relief for investors that for the first time in over a year, Mindtree has beaten the Street’s expectations by a meaningful margin.

Revenue grew 2% sequentially in constant currency terms last quarter, compared to estimated growth of less than 1%. What’s more, margins rose by 60 basis points, again ahead of estimates, indicating that the burn at Bluefin has reduced meaningfully. The company said that Bluefin’s revenue increased more than 11% sequentially; although, of course, it makes sense to wait and see if the recovery will sustain.

The churn in Mindtree’s top 10 customers continues, and the company said it is in the process of rebuilding its top 10 portfolio. Last quarter, growth in the revenues of top 10 customers rose 0.7%, far lower than the company’s average growth rate.

And in a clear sign that Mindtree isn’t exactly out of the woods, year-on-year growth in revenue stood at merely 0.3%. In this backdrop, the company’s assertion that growth in fiscal year 2018 will be in low double-digits seems ambitious at first.

Having said that, Mindtree’s strong deal wins in the past few quarters also provide hope that growth will pick up in the new fiscal year.

Work has commenced on some of the large deal wins in the December quarter, with on-site effort increasing by 6.1% sequentially last quarter. And while deal wins in the March quarter was considerably lower vis-à-vis December, at $209 million, on a cumulative basis the total contract value won by the company in the past few quarters should help sustain growth.

“Even as the overall growth has slipped, Mindtree’s customer relationships and engagement with deal advisory (firms) continues to be strong and could result in an improvement in growth rates starting the June quarter," analysts at Kotak Institutional Equities said in a recent note to clients.

Of course, given the rough ride investors have had with Mindtree shares in the past year, they may do well to be cautious. Besides the fact that it makes sense to wait for the company to deliver consistent performance, it’s also important to remember that valuations aren’t cheap at 17.8 times trailing earnings.