After the slow start in the first quarter of FY20, Mindtree Ltd’s second-quarter growth improved sequentially both in terms of revenue growth and profit margins.

Mindtree’s revenues were up 3.2% quarter on quarter in constant currency terms and up 11.1% year on year. Also, as there were no one-off expenditures or write-offs, Ebitda margins also showed a healthy improvement. Ebitda margins improved to 12.9% in Q2FY20 from about 10% in Q1FY20. Ebitda is earnings before, interest, tax, depreciation and amortization. These numbers were broadly in-line with what analysts had estimated for the second quarter.

Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

While all this is good, a sign of worry has been the disappointment in revenue productivity even as attrition rates have increased over last year. “We are intrigued by the sharp decline in revenue productivity for the second quarter; note that volume growth has continued to be very strong for the last couple of quarters, however, revenue productivity has declined sharply as well. Attrition jumped up on both in the last twelve months as well as a quarterly annualized basis," said analysts at Emkay Global Financial Services in a note to clients. Revenue productivity refers average revenues for every man-hour of services billed to customers. A drop in productivity implies growth was driven by volumes, while average price realisations fell.

Nevertheless, several of Mindtree’s verticals have seen improved performance. Hi-Tech and Media grew 11.4% y-o-y, while travel and hospitality grew by 11.9% y-o-y; and BFSI grew by 6.3% y-o-y; Retail CPG and Manufacturing grew by 9.7% y-o-y

Like other Indian IT companies, digitization is playing a key role in the growth of IT services businesses, which has been aiding revenue growth. Mindtree has deployed about 700 bots (674 in Q1 FY20), and has seen its digital business grow by about 19% y-o-y. In fact, digital deal wins stood at about $140 million in Q2 FY20 compared to $137 million in Q1 FY 20.

Still, it seems like the market was probably expecting a bit more looking at the increase of about 2.5% in the Mindtree stock on Tuesday. Overall, the margin and growth trajectory still remains a concern for analysts. “We believe that the investor focus should be on understanding the overall growth/margin trajectory from the company. We do not see any material change to our ‘below consensus’ EPS estimates of 33/43 respectively," said Emkay in the client note.

Note that in the first six months, Mindtree’s earnings per share (EPS) is only at Rs13.85, whereas consensus estimates compiled by Bloomberg suggest earnings of Rs36 per share for the full year. Achieving this looks like a tall order, notwithstanding the uptick in the September quarter. Meanwhile, Mindtree’s valuations are right up there with mid-cap IT firms at over 15 times estimated FY21 earnings. Unless earnings catch up further with the Street’s aggressive estimates, there would be disappointment in store for investors.