BackThe curious case of Mindtree’s profit warning
Mindtree reported a robust 3.6% sequential growth in organic revenues in constant currency terms
PremiumOn 7 March, Mindtree Ltd issued a profit warning to investors, citing delays in project starts in the retail and banking and financial services segments. Its shares fell by over 15% in the next three trading sessions. Earlier this week, when the company announced results, it turned out that things were hardly as bad as feared.
In fact, Mindtree reported a robust 3.6% sequential growth in organic revenues in constant currency terms. In March, the company had said it expects organic revenues to grow marginally compared to the December quarter. Based on those remarks, analysts at Kotak Institutional Equities had estimated revenue growth of 1%.
According to an analyst at a domestic institutional brokerage firm, “Even though the company has explained why things turned out to be far better than it had anticipated, the episode will give rise to concerns about the management’s credibility."
As if this wasn’t bad enough, Mindtree’s better-than-expected results were preceded by a 5.7% jump in its shares, raising a stink about probable insider trading.
The results themselves were fairly impressive. The company told analysts that the challenges in the retail and banking and financial services segments weren’t as severe as it had anticipated, and that other segments did well.
While revenues in retail and banking and financial services fell by 5% and 2%, respectively, revenues in the technology, media and services vertical rose 10.2% sequentially in dollar terms. The travel and hospitality segment grew by 9%.
Ebitda (earnings before interest, tax, depreciation and amortization) margin fell by 60 basis points, partly because of the consolidation of recent acquisitions. But because revenue was far higher than expectations, reported profit beat estimates. A basis point is one-hundredth of a percentage point.
The company, however, expects the troubles in some of its accounts to persist, and indicated to analysts that growth in the current fiscal year is likely to be back-ended. Even so, it seems well placed to beat industry growth estimates.
But valuations at 20 times trailing earnings are rich, especially for a company the size of Mindtree. Analysts at JM Financial Institutional Securities Ltd said in a note to clients, “We remain constrained by the stock’s rich valuations. Mindtree trades almost at-par with tier-1 players and at the upper end of mid-cap price-earnings band."
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