Q2 show, outlook extend rally in Mindtree, stock up 200% over past year

The street can’t seem to have enough of mid-cap IT major Mindtree. Despite the stellar rally over the last year, the stock added 10 per cent to its tally on Thursday. With this the stock is up over 200 per cent or thrice its value a year ago.

The trigger for the latest surge has been the best in class outperformance on revenues with margin performance and outlook adding to the optimism. A 12.7 per cent sequential revenue uptick was better than most estimates and was driven by broad-based growth across verticals.

The disappointment was the flattish performance in business from its top client whose share of revenues now stands at 24 per cent. The positive, however, is that the share has come down from 30 per cent in the year ago quarter which has led to a more diversified growth mix.  Excluding the top client, growth came in at 17.6 per cent.

The street also took notice of the margin performance. Despite wage hikes in the quarter, operating profit margins rose 20 basis points q-o-q to 20.5 per cent. Topline led operating leverage and current benefits were able to offset the 140 basis impact of the wage hikes. The company believes it can maintain margins above the 20 per cent mark in FY22 on the back of revenue growth, gains from the work from home shift, higher offshoring and increasing proportion of freshers.

Though deal wins moderated from Q1 levels of $504 million, they were still healthy at $360 million. In addition to this, a healthy deal pipeline and expectation of revenue growth across segments gives the management confidence of posting double digit growth in the current year.

Given the strong Q2 show and robust outlook, most brokerages have raised their profit estimates of the company by over 7 per cent over the next couple of years. However, valuations at over 40 times its FY23 earnings estimates pushes it into expensive territory.

Analysts at Kotak Institutional Equities while raising FY22-24 earnings estimates by 6-14 per cent on the back of strong execution highlight that they are wary of stretched margins that have downside risks. Further, gaps in portfolio of offerings can prevent consistent scale-up across client buckets.

Given the sharp gains, investors could look at corrections and a 3-5 year holding period for sizeable gains in the stock.