Mindtree shares tank over 11% even as net profit nearly doubles in Q2; what should investors do with stock?

Mindtree share price tumbled over 11 per cent to Rs 1,264.25 apiece on BSE, even as the IT company posted an 87.9 per cent on-year rise in consolidated net profit of Rs 253.7 crore in the second quarter. The company had registered a net profit of Rs 135 crore in the corresponding quarter of the preceding fiscal. Mindtree has also announced to roll out salary hikes with effect from January 1, 2021. The revenue of the company grew marginally to Rs 1,926 crore in the September 2020 quarter from Rs 1,914.3 crore in the year-ago period. “We have a ‘sell” rating on Mindtree as we believe risk-reward is unfavourable due to its high exposure to T&H vertical, disproportionate dependence on top clients and softer growth trajectory compared to midcap and larger peers,” Suyog Kulkarni Senior Research Analyst at Reliance Securities, told Financial Express Online.

Analysts at Reliance Securities said that Mindtree’s Q2 revenues came 200bp below their estimate whereas EBIT margin came 100bps ahead of expectations. Revenue from top clients remained flat QoQ and Travel & Hospitality (T&H) vertical continued to remain soft.

Mindtree said that the third quarter would witness similar growth despite being a seasonally weak quarter. It indicated that its strategy to transform from a project-based business to an annuity based one is still on. Research and brokerage firm Nirmal Bang said that post the second quarter of the current fiscal, it has raised its estimates on revenue, margins (significantly) and EPS. “We also raise target PE multiple for MTCL consequent to the target PE multiple upgrades for sector benchmark TCS (25x),” it added. It has pegged a target price of Rs 1,544, an upside of 8 per cent with ‘accumulate’ rating to it.

Research firm HDFC Securities has maintained an ad rating with a target price of Rs 1,450 apiece. It noted that although deal wins were soft in the second quarter with TCV at USD 303mn, they are higher by 10 per cent on-year in 1HFY21. “Growth is expected to be led by Retail, CPG & Manufacturing vertical (Husqvarna & S/4 HANA deals) and CMT vertical, and a protracted recovery profile for Travel & Hospitality vertical,” it added.

Motilal Oswal Financial Services said that Mindtree’s revenue growth was largely in-line. Margin expansion of 160bp QoQ was a surprise. The stock has been one of the best performers in CY20 in the IT sector, with returns of 77% YTD. “We believe the key positives are already captured and see limited upside hereafter. It has downgraded the stock to neutral, with a target price of Rs 1,550 apiece, implying a potential upside of 9 per cent.

On the other hand, ICICI Direct Research has recommended to buy the stock, with a price target of Rs 1,680 per share. It will take Mindtree to jump 18 per cent from the previous close to hit the target pegged by the brokerage firm. It believes the company’s expertise in digital technology will make it a key beneficiary of improved traction in the cloud in the coming years. In addition, vendor consolidation opportunities, improving win ratio, increase in annuity business will provide long term visibility to revenues.