Mumbai: Mindtree Ltd matched its guidance and reported better growth in the March quarter. The company registered 3.9% sequential rise in revenue, up from the 2.4% expansion seen in the December quarter in constant currency terms. This is notably higher than the Street’s estimates, underscoring a strong execution.
Additionally, the company announced a special dividend of ₹20 per equity share. This special dividend comes on the heels of a takeover bid by Larsen and Toubro Ltd (L&T). This may well force L&T to raise its offer price for Mindtree by a similar amount.
For its part, Mindtree maintains that the special dividend is to commemorate its 20th anniversary. The payout will substantially lower cash and financial investments on the books. With growth rates healthy, the company intends to offer higher payouts.
However, investors who choose not participate in L&T’s open offer have to deal with a slowdown in order inflows. As the chart alongside shows, total contracts signed by Mindtree dropped both from the year-ago period, as well as on a sequential basis. From $306 million in the June quarter (Q1 FY19), orders declined to $242 million in the March quarter.
Worryingly, the last three quarters have also seen a marked slowdown in digital contract inflows, which have been a core focus area for the company and the industry. The moderation in deal wins comes amid growing headwinds in the global economy due to Brexit and prolonged uncertainty in the US.
While the past order wins give Mindtree a good start to FY20, the steady slowdown in order inflows can weigh on future revenue momentum. However, the company’s management is confident of maintaining the current growth momentum. It expects revenue to grow in the low teens in FY20. Margins are projected to expand 100 basis points on a full-year basis. A basis point is equal to one-hundredth of a percentage point.
The commentary on the future outlook should comfort investors, though guided growth is not significantly higher than in FY19.
All key business verticals expanded last quarter. The high-tech and media services vertical led the growth, registering a sequential 4.7% increase in revenue.
Importantly, the management sees good visibility in its revenue growth from top clients. Unlike other software firms, Mindtree is highly dependent on its large clients. Its largest customer generates as much as a fifth of its revenue. The last quarter saw 42.9% of its revenue coming from the top 10 clients. This contribution moderated from 43.7% in Q4 FY18, pointing to broadening of its client base.
While the commentary should keep growth prospects upbeat, it is crucial that the company regains the momentum in deal wins. At 18 times FY20’s earnings estimates, the Mindtree stock is quoting at a premium to larger peers and that may not leave much on the table.