by Suhani Adilabadkar

Last year, Mindtree crossed a milestone, crossing the US$1 bn revenue threshold 20 years after it was founded. Long regarded as more mid-tier than top tier among the Indian IT firms, Mindtree is in digital transformation and technology services, and is now part of  the Larsen & Toubro stable. The firm deals in e-commerce, mobile applications, cloud computing, digital transformation, data analytics, enterprise application integration and enterprise resource planning. Operating in retail, CPG and manufacturing, BFSI, travel and hospitality and high technology & media, Mindtree caters to above 300 clients across 18 countries with more than 70% of its revenue mix accruing from North America. 

Quick Takes:

• Operating revenues grew 11.5% in Q4 FY20, reported at Rs. 2050 crore against Rs. 1839 crore same period previous year. 

• In dollar terms, revenue stood at $278 mn with 1.2% growth QoQ and 6.3% YoY. 

• Hi-tech & media segment jumped 15% YoY and US market grew 11% YoY in revenues.

• One year after the change in management, Mindtree seems to have gotten back on its feet. Covid-19 impacted many of its larger peers in Q4 FY20, but had limited impact on Mindtree’s March revenue profile.

• Mindtree has flagged a soft Q1 FY21 both in terms of revenue and margins, due to the impact of the pandemic. Analysts have have also highlighted client concentration as a concern.

A Covid-19 Free March Quarter 

Mindtree reported strong numbers with no visible impact of Covid-19 in the March quarter. Operating revenue growth came out in double digits, 11.5% in Q4 FY20, reported at Rs. 2050 crore against Rs. 1839 crore same period previous year. In dollar terms, revenue stood at $278 mn with 1.2% growth QoQ and 6.3% YoY. 

Operating profit stood at Rs. 324 crore in March quarter FY20 against Rs. 280 crore in the corresponding quarter last year, rising 15% YoY. Thanks to cost efficiency and rupee depreciation, operating margin came out at 15.79% compared to 15.24% expanding 55 bps YoY. PAT or net profit jumped 4% YoY at Rs. 206 crore compared to Rs. 198 crore same period previous year.  

Speaking about the upcoming quarter, Mr. Debashis Chatterjee, CEO and MD of Mindtree said, “Looking ahead to fiscal 2021, we anticipate softness in demand due to the unprecedented COVID-19 pandemic. However, we’re well equipped to handle the global crisis based on the business continuity plan we have successfully implemented”. 

Management Guides for a Soft June Quarter

Mindtree slipped 10% in share price after three of its co-founders resigned in July 2019, as L&T took control. The September quarter FY20 was impacted by higher costs,slowing of large accounts and overall transition of promoter control. Stability returned with Q3 FY20 and Q4 saw further consolidation. One year after the change in guard, Mindtree seems to have gotten back on its feet. Covid-19 impacted many of its larger peers in Q4 FY20, but had limited impact on Mindtree’s March revenue profile, mainly due to its proactiveness in the first week of March in migrating 98% of its workforce to ‘WFH’ much before the lockdown was announced on 24th March. The company has also moved its hiring process including onboarding, learning platform and campus training program to digital. 

As per the management, the March quarter was Covid free in impact as Mindtree came out with strong double-digit revenue growth and operating profit. The company witnessed record contract signing for the quarter at $ 393 mn of which renewals were $ 206 mn and new contracts were $187 mn. Short term contracts, to be executed within one year stood at $286 mn, forming 73% of total contract value. Coming to geographical performance, US topped the table with 11% YoY and 4% sequential growth while Europe reported 12% YoY and 8% QoQ degrowth contributing 77% and 15% respectively to total revenue mix. 

Moving on to segmental performance, Hi-tech & media (43% revenues) was the only growth driver with 15% YoY growth followed by 5% jump reported by travel & hospitality (16% revenues), BFSI (20% revenues) was flat and CPG, retail & manufacturing (20% revenues) came out with 3% negative growth. Though Mindtree has been able to report strong numbers in the March quarter, growth looks skewed, exhibiting low resilience in the current unpredictable and volatile environment.   

Speaking on Covid-19 impact on the upcoming Q1 FY21, Mr Chatterjee said, “ We see some softness in the near-term in terms of our overall revenues, at least in Q1 we see some softness and if there is softness, then we can probably see some softness in terms of our margin as well”. The management further added that June quarter would be softer than Q4 FY20. Despite Covid impacting retail and hospitality segments, strong traction is expected from Hi-tech and consumer goods as customers are willing to move to digital post Covid outbreak. 

Will Mindtree break its way to the top?

Though investors seem to be happy with Mindtree’s March performance, analysts still have reservations with respect to its high-top client reliance as roughly 20% of its revenue mix accrues from a single client. Next in line as a potential issue, is the higher revenue concentration in US markets with Europe reporting negative or tepid growth for the past one year.

In the current Covid environment, travel & hospitality segment with a 16% revenue contribution poses a risk in the near future, while other concerns include a high dependence on hitech & media with subdued performance from other three segments from the last two years, lack of product differentiation, lower digital growth trajectory compared to rest of its industry peers and business model skewed towards short term discretionary projects. 

Though, Mindtree has been fighting for years to come out of the midcap trap on its own, its wait might be over as the street expects a three-way merger with its other two siblings, Larsen & Toubro Infotech and Larsen & Toubro Technology services. If done right, a three-engine rocket may be the thing that Mindtree needs to power it forward.