Mindtree Stock Slumps As Analysts Flag Top Client Risk

Shares of Mindtree Ltd. fell the most in seven months as analysts remained cautious on the mid-sized IT company, citing persistent weakness among top clients.

The company’s net profit rose 19.1% quarter-on-quarter to Rs 253.7 crore in the July-September period. Its revenue in dollar terms rose 3.1% to $261 million, while EBIT jumped 11.6% to Rs 321.5 crore.

Its growth in constant currency terms for the quarter stood at 2.1%.

Of the 38 analysts tracking Mindtree, 16 have a ‘buy’ rating, nine suggest a ‘hold’ and the rest recommends a ‘sell’. The average of Bloomberg consensus 12-month target price is 3.9%. Shares ended the trading day 6.6% lower at Rs 1,331, down for the third straight day. The stock had fallen as much as 11.4% in early trade.

Here’s what brokerages had to say:

UBS

• Maintains sell rating
• Price target at Rs 805 apiece
• Continues to target profitable growth in the second half of FY21
• Softening trends in top customer likely to raise concerns
• Top customer has a significant contribution to revenue
• Softer contract values are likely to add to investor concerns on revenue outlook

Citi

• Maintains sell rating
• Price target raised to Rs 1,195 from Rs 1,150 apiece
• Q2 results were largely in line with estimates
• Raises EPS estimates for FY21, FY22, FY23 by 7%, 4% and 4%, respectively, given higher-margin trajectory
• Weaker trends versus large caps, particularly given headcount decline
• Top client exposure continues to be a risk
• Any pressure on the top client can lead to de-rating
• Sustaining margins at current levels will be difficult, given wage hikes across the sector

Motilal Oswal

• Downgrades to neutral from buy
• Price target at Rs 1,550 apiece
• Management commentary to sustain margins despite wage hikes is encouraging
• Deal wins stable, the deal pipeline remains healthy
• Persistent weakness in the top 2-10 client bucket remains a concerns
• An unexpected decline in top client chips away at bull case
• High exposure to travel, transport and hospitality to remain a drag on overall recovery
• Upgrades FY21 and FY22 EPS estimates by 4% and 3% to adjust for margin surprise
• Key positives are already captured and see limited upside

Investec

• Downgrades to sell from hold
• Price target raised to Rs 1,255 from Rs 1,020
• Business mix likely to continue to improve offshore
• Top client softness impacts broad-based performance
• Current estimates factor in most positives with incremental upgrades unlikely

Emkay

• Assumes coverage with a sell rating
• The price target of Rs 1,330 apiece
• Better operating efficiencies aided margins
• Deal wins remain weak and Q3 is a seasonally weak quarter
• Increased concentration and growing dependency on top client remains a concern
• Revenue growth is skewed and valuations are rich

Dolat Capital

• Maintains sell rating
• Price target raised to Rs 1,190 from Rs 830
• Commentary encouraging but not evident across metrics
• Soft performance from top clients, sustained weakness in travel verticals and flat total contract value is not encouraging
• Current valuations are unwarranted given the volatility in top client and soft total contract value