Deal wins, digital share, improve margins key for Mindtree; stock gains 2%

The stock of mid-cap IT services provider Mindtree is up about 3 per cent, on expectations that the company will be able to maintain its track record of revenue outperformance, improve margins, and grow its digital business. 

Further, given that its share of off-shoring is the highest among large and mid-cap IT companies, the sharp rupee depreciation is expected to be a tailwind.

The management, during an analyst meet, highlighted that its portfolio mix, improved execution and digital competencies — coupled with higher share of large deals — is expected to help drive growth. 

Total contract value exceeded the $1 billion mark in the March 2018 quarter and the momentum has continued in the June quarter.  

The company reiterated that it would outperform the overall sector on the back of its growth strategies. 

Analysts at Kotak Institutional Equities expect the company to sustain its growth momentum, which picked up from the December quarter of FY18. 

They estimate that growth in FY19 will be 17 per cent, while it will be in the teens in subsequent years. In addition to the benefit from higher growth, margins, which came in at 14.1 per cent in the June quarter, too are expected to expand on the back of operational efficiencies.

The other trigger is depreciation of the rupee. With operations being largely offshore-centric —77 per cent of operations are in India — while 73 per cent of revenues come from the US, the fall in the rupee will boost earnings.

Given the outlook on revenues and margins, analysts at IDFC Securities have revised their net profit estimates for FY19 and FY20 upwards, by 1.5 per cent to 4 per cent.  

While analysts believe that the company deserves a premium given superior growth and digital capabilities, the stock at the current levels of 21 times its FY20 earnings estimates is on the higher side. 

Most of its mid- and small-cap peers are trading at 13-19 times. 

Among the larger caps, only TCS, at 23 times, is trading at higher valuations. Investors can look at the stock on dips.