After 150% rally, Q3 results opened up further upside for this IT midcap firm


NEW DELHI: This midcap IT firm has reported industry-beating numbers for the December quarter, earning a healthy earning upgrade. The company’s margin for the quarter stood at a decadal high, as was sequential revenue growth. The management commentary, too, was strong.

But following a sharp 150 per cent rally in the stock over the past 10 months, analysts have mixed views on its potential for further upside. Yet, the most optimistic targets still suggest up to 70 per cent upside on the counter.

The stock is Mindtree.

CEO Debashis Chatterjee said December quarter was his company’s best performing one in recent years, backed by broadbased revenue growth of 5 per cent across verticals and service lines, robust margin expansion of 350 basis points and a healthy order book of $312 million.

Edelweiss’ price target upgrade for the stock has been among the highest, even though it believes the recent sharp run-up in the stock could lead to softness on the counter in the short term.

At present, the stock trades at 21.1 times FY22 expected earnings per share and Edelweiss’ target on the stock of Rs 2,821 (from Rs 2,044) is based on 35 times Q1FY23 earnings.

At Monday’s close of Rs 1,680, that price target represents over 60 per cent potential upside. Following Q3 numbers, the stock traded 5 per cent higher at Rs 1,757 on BSE on Wednesday.

“After disappointing on the growth front in the past couple of quarters, Mindtree delivered solid revenue growth in Q3FY21. The company posted the highest-ever sequential growth for Q3 in a decade. Ebitda margin at 23.1 per cent was the highest in a decade, led by revenue growth and operational efficiencies,” it said, noting that the management is confident of maintaining over 20 per cent margin despite the wage hikes effected from January 1,” Edelweiss said.

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The IT firm reported a 65.7 per cent rise in consolidated net profit for December quarter at Rs 326.5 crore and claimed its deal pipeline continues to be strong. The Bengaluru-based company had posted Rs 197 crore profit for the year-ago period.

Revenue grew 3 per cent to Rs 2,023.70 crore from Rs 1,965.30 crore in the year-ago period. The stock is up 148 per cent from its 52-week low of Rs 691.95 hit on April 3, 2019.

During the quarter, the company’s reported deal wins of $312 million was lower than the average of $350 million in last four quarters, even as its largecap peers continued to report record deal wins.

Mindtree expects deal wins to improve in the coming quarters as the pipeline remains strong, analysts said.

Motilal Oswal expects the company to benefit from a strong demand environment, especially given the high exposure to cloud (nearly 19 per cent of revenues) and low-to-mid teens dollar revenue growth.

The brokerage said the company should benefit from a strong margin expansion of 10 percentage points over Q2FY20–QFY21 (10pp), the majority of which is expected to be retained despite an increase in investments in sales and new employee additions. That said, a 28.5 per cent exposure to the top client is seen as a risk.

Noting that Mindtree was one of the best performers in Calendar 2020, Motilal believes the key positives for the stock are already captured, and thus the upside could be limited. It has a price target of Rs 1,765 on the stock.

Antique Stock Broking values Mindtree at 24 times FY23 EPS and has revised its price target to Rs 1,950 from Rs 1,850 earlier. “Our valuation multiple is at a 10 per cent discount to our valuation multiple of L&T Infotech as we expect growth in the near term to be lower. We have increased our EPS estimate by 5 per cent as we increase margins assumptions for FY22/23,” Antique said.

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Phillip Capital said there is enough near-term play left in the stock, as it anticipates more EPS upgrades after Mindtree beat Street expectations on margins. “All along, we also expect its eventual merger with L&T Infotech to provide long-term upside,” it said suggesting a price target of Rs 2,000 for the stock.





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