Home / Markets / Mark To Market /  Mindtree's Q4 earnings decent, but rich valuations discomforting

Midcap IT services provider Mindtree Ltd. saw yet another quarter of more than 5% revenue growth. In constant currency (CC) terms, revenue rose 5.2% sequentially, ahead of consensus estimate. Growth was broad-based, across most verticals and geographies.

The company continues to win many short-cycle deals, with the total contract value of its deals rising 9% sequentially to $390 million in the March quarter. In a post earnings conference call, the management said demand environment remains strong, and the company expects to clock industry-leading growth in FY23 aided by a robust deal pipeline.

While Ebit margin was in-line with analysts' expectations, it fell 30 basis points sequentially to 18.9%. One basis point is one hundredeth of a percentage point. Ebit is short for earnings before interest and tax. It should be noted that Mindtree's attrition rate remains high.

The management cautioned of cost pressures from supply-side challenges, but continues to offset that with operating efficiencies. Measures such as pyramid rationalisation, reduced sub-contracting, and pricing are expected to provide some cushion to margins, that said, there may be some headwinds on travel costs.

For FY23, the management has retained its Ebitda margin guidance of more than 20%. In FY22, the company reported an Ebitda margin of 21%. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Yet, the stock's premium valuations are discomforting.

"After a strong FY2022, Mindtree is gunning for industry-leading growth in FY2023E, a possibility but we note abating tailwinds and the build-up in headwinds," said analysts at Kotak Institutional Equities. While Mindtree will benefit from strong demand and disciplined execution but is more vulnerable than peers, said the domestic brokerage house. "Valuations are expensive at 30 times FY2024E earnings," added the Kotak report.

Concurring, analysts at Nirmal Bang Institutional Equities said, "We fear that Indian tier-2 IT would suffer because of vendor consolidation under the pressured profit picture for customers, a less diversified revenue mix and a larger exposure to non-Global 1000 clientele and valuation that is much richer (at 40% premium now to Tier-1 compared to 14% discount on 1st January, 2020)."

Reacting to Q4 earnings, shares of Mindtree fell 1.6% on the National Stock Exchange in Tuesday's opening deals.

Meanwhile, media reports claim that Mindtree is in talks with parent Larsen & Toubro to merge it with Larsen & Toubro Infotech Ltd. Mindtree, however, has dismissed these reports as speculative.

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