Mindtree shares fall 10% after underwhelming Q2 results1 min read . Updated: 16 Oct 2020, 09:34 AM IST
The deal pipeline slowed down a bit in Q2, with overall wins in the range of $303 mn, lagging behind Q1’s $391 mn
After the top-tier companies posted a sharp growth in IT revenues, investors have been looking for cues on how mid-sized IT companies were faring after covid-led disruptions. On that count, Mindtree Ltd’s second-quarter numbers have been just about average. The stock of the mid-tier IT company dipped about 8% on Thursday, ahead of the results. But the shares are still about 100% higher compared to its March lows. The shares fell another 9% when trading resumed on Friday.
Mindtree’s sequential revenue declined by about 3.1% year-on-year, and did not outpace expectations, unlike its larger peers such as Infosys Ltd and Tata Consultancy Services Ltd. Even so, growth in the banking and finance and retail and manufacturing verticals have been encouraging. Revenues from retail and manufacturing were up about 7.6% sequentially. Travel and hospitality showed a marginal improvement after dipping substantially in Q1.
Revenue from its top client, Microsoft, was down about 1% sequentially, and accounted for about 28.9% of total revenues. This has put some stress on its revenue from the top 10 clients. Even so, analysts said Q1 was perhaps an exceptional quarter for Microsoft, and that’s why there has been some moderation due to a higher base.
The deal pipeline also seemed to slow down a bit in Q2. Overall deal wins were in the range of $303 million, lagging behind Q1’s $391-million signed contracts.
But the firm did well on operating metrics, thanks to cost savings from offshore accounts, as well as travel and other savings. Mindtree’s Ebit margins came in at 16.7%, up 160 basis points sequentially. While it was expected that margins would show an improvement, the margin beat is nevertheless encouraging. It is also focusing on manpower improvement.
“Focus on improving margins has yielded good results. Reduction in subcontractor usage, focus on re-skilling as opposed to lateral hiring for key skills, lower variable compensation, wage hike deferrals, cost rationalization in small accounts are levers that Mindtree can flex to protect margin profile," said Kotak Institutional Equities in a report.
The Mindtree stock has done well this year and is up about 37% from its pre-covid highs. But despite the decent results, the sharp run-up in valuations to about 27 times trailing 12-month earnings is not quite comforting.