Mindtree faces risks of high client concentration despite a decent Q4
Management has guided for double-digit revenue growth in FY22 with operating margins above 20%
The March quarter results of mid-tier IT services firm Mindtree Ltd were largely in line with the Street’s estimates. In US dollar terms, the company’s revenue saw sequential growth of 5.2%, aided by its travel transportation and hospitality (T&H) segment.
As anticipated, Mindtree’s operating margins at 21.9% slipped from 23.1% in Q3FY21, impacted by salary hikes.
Deal wins saw a sequential improvement with total contract value at $375 million during the March quarter, up from $312 million in the December quarter.
Going ahead, the Mindtree management has guided for double-digit revenue growth in FY22 with operating margins above 20%. In a post-earnings call, the management said the confidence on revenue growth stems from the company’s robust deal pipeline and conversion of large deals.
According to analysts, while earnings have met expectations, concerns of high client concentration remain. In the March quarter, top client contribution saw a marginal decline to 28% from 28.5% in Q3FY21. Mindtree’s higher dependence on one vertical for growth adds to the discomfort of investors, analysts said.
“We believe risk-reward is unfavourable in case of Mindtree due to its high exposure to the T&H vertical and disproportionate dependence on top clients. We will become constructive on the stock if we see a step up in growth in top 2-20 clients or a sharp rebound in the T&H vertical,” said Suyog Kulkarni, senior analyst at Reliance Securities Ltd. EPS is short for earnings per share.
“Since the stock has seen a sharp run-up in the past one year, we feel that the positives of large deal wins are priced in. Valuations are expensive against the backdrop of slow recovery in most segments and a handful of clients driving its growth. Most of their business segments have to make a massive comeback for this kind of valuation to justify,” said an analyst with a domestic brokerage, seeking anonymity.
In the past one year, Mindtree shares have rallied by 166%, outperforming sector index Nifty IT, which rose 111% in the same period. Mindtree trades at 24.5 times on FY23 consensus EPS, which is a 25% premium to Mphasis, said Kulkarni.
Meanwhile, the company’s attrition rate stood at 12.1% in the March quarter, lower than the previous quarter.
The management said that it is taking necessary steps to deal with attrition as demand for certain types of skills remains high in the industry. Analysts said the increase in the attrition rate and salary hikes pose a threat to the company’s margins.
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