Why You Should Make Profits on Mindtree Stocks

Investors can register profits in the shares of the computer services company Mindtree. Its current price implies a PE of 43 times next twelve month EPS (ntm) (Bloomberg Consensus), which is at a premium of 125% and 93% from its 5 and 2 year average, respectively. Mindtree, like many of India’s leading IT services companies, has been successful in weathering the disruption of the pandemic and has managed to significantly improve its margins in FY 21. In addition, it is also expected to grow faster than l industry with revenues for fiscal year 21-23 and EPS CAGR of 17 and 21% respectively. While this is slightly better compared to Tier 1 peers who are expected to increase their earnings for the same period in mid-teens, it does not warrant the premium assessment. However, at current levels, these improvements are more than correctly reflected in its valuation, with a PE / earnings growth ratio above 2. The company is also trading more expensive than Tier 1 IT service companies which enjoy better savings. of scale and have better EBITDA / EBIT margins than Mindtree. Any return closer to the mean could result in a significant correction from current levels. As a result, investors may register profits and look to revert to lower entry points.

Business

Founded in 1999, Mindtree has successfully crossed the Indian IT landscape over the past two decades to become one of the leading Indian mid-level IT service companies. The company continued to grow, although a significant property changed hands and L&T became its promoter after acquiring a 60% stake in the company in 2019. As part of a new strategy – 4 x4 x 4 recently unveiled by the company, it plans to take advantage of growth over the next few years by focusing on four verticals across four service lines in four geographies. The four verticals are Communication / Tech, Retail, BFSI and Travel. These contributed 50, 21, 20 and 9 percent, respectively, to 2021 revenue. The travel segment suffered most of the impact of the pandemic, increasing by 17 percent during the year. Fiscal year 2020 and the communication / technology segment performed better thanks to digitization trends. In terms of geographic exposure, North America accounted for 77% of revenue, Continental Europe (7%), UK and Ireland (8%) and APAC (8%) .

Recent performances

Mindtree had a strong run in FY21 despite dropping revenue by around 1% in US dollars to around $ 1.08 billion (₹ 7,968 crore). This good performance was driven by a significant jump in EBITDA margins during the year – up nearly 700 basis points to 20.8%. The company was able to achieve this by optimizing labor costs, reducing travel and marketing costs, and taking advantage of depreciating currencies. This allowed the company to increase its net profits by a good 76 percent for the year to 1,110 crore.

Positive points assessed in

In the past year, Mindtree’s stock has risen by around 220% and around 260% from its pre-pandemic highs. As mentioned above, it now presents a significant premium over historical valuations, which do not appear to be sufficiently supported by its future growth prospects at the moment (revenue growth / EPS). Although the improvement in margin it brought during FY21 warrants a reassessment, this is reflected more than well in the performance of its stocks. A few factors should also be noted in regards to its margins – one, even after the improvement, its 20.8 percent EBITDA margins are still significantly lower than the FY21 EBITDA margin of the companies. level 1 such as Infosys and TCS at around 28 percent. hundred. Second, much of the margin improvement is lagging behind, with consensus expectations for FY22 and FY23 below around 20%. Company management has also only guided keeping EBITDA margins above 20 percent, not an increase in fiscal 21. Therefore, taking these factors into account, Mindtree is trading at a premium. compared to level 1 IT service companies (Infy ntm PE at 30 times, TCS at 34) seems untenable. Not to mention the fact that Tier 1 IT service companies themselves are expensive.

Additionally, at current price levels where there is absolutely no margin of safety for execution errors, investors should also be aware of a few other risks that can normally be ruled out when valuation is cheap. . Mindtree has a high concentration of clients with its main client (Microsoft), accounting for 29% of sales in fiscal year 21. Finally, its free cash flow return (FY21 FCF / Market capitalization) of approximately 1.5% implies that returns on capital to shareholders will not be exciting.

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