Apr 21, 2017 03:54 PM IST | Source:

Analysts cheer Mindtree Q4 earnings but cut earnings estimates on currency headwinds

While maintaining neutral rating on Mindtree, Motilal Oswal revised downward its FY18/FY19 EPS by 11/6 percent.

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Analysts gave thumbs up to Mindtree's Q4 earnings and FY18 outlook, saying worst seems over for the company but slashed earnings growth estimates due to currency headwinds.

While maintaining neutral rating on the stock, Motilal Oswal revised downward its FY18/FY19 EPS by 11/6 percent, which is mainly from a lower margin estimate in FY18 and a stronger rupee for both FY18 and FY19. Over FY17-19, the brokerage house expects revenue CAGR of 9 percent and earnings CAGR of 21 percent.

Macquarie has maintained an underperform rating on the stock with a cut in target price at Rs 380 (from Rs 390) and lowering FY18-19 EPS by 15-22 percent as it thinks EBIT margin recovery back to around 15 percent (of FY16) is going to be a long journey despite recent improvement in subsidiaries like Bluefin and Magnet.

EBIT margin of the company improved 70bps QoQ to 10.6 percent (yet it is down 380bps YoY) but profit declined 5.8 percent QoQ due to forex losses. In the near term, with a revenue pick-up in the company and its subsidiaries, Macquarie expects it to claw back to 10.3 percent (+10bps YoY) in FY18.

Management's efforts of cost optimisation, improving utilisation and improved performance in Bluefin and Magnet will likely be offset by currency rise, it feels.

The rupee's appreciation of around 3.5 percent against US dollar should keep revenue growth in the high-single digits, according to the research house that built in 8.8 percent revenue growth in FY18.

Mindtree's Q4FY17 revenue growth at 1.8 percent (and 2 percent in constant currency) QoQ showed continuing stabilisation after a dip in first half of FY17. Management's optimism regarding deal pipeline leading to 'low-double-digit' revenue growth (in constant currency) needs strong deal wins in the next few quarter as deal wins in FY17 are up 4.3 percent YoY, the brokerage house says.

Deal wins remained quite volatile with quarterly fluctuations ranging from USD 180 million to USD 314 million. Recent events like snap elections in the UK could also aid in volatility in the near term (as seen with Brexit in CY16), according to Macquarie.

The brokerage house foresees margin recovery to remain gradual and has hence lowered its FY18-19 EPS by 15-22 percent. It further said that FY17 revenue growth was marred by client-specific issues.

Morgan Stanley also maintained its underweight stance on the stock with a cut in target price to Rs 410 from Rs 435, saying its revenue growth forecast for FY18 (around 10 percent YoY) is in line with management's outlook, but it trimmed margin assumptions, factoring in the impact of a stronger rupee and higher-than-expected tax rates. The research house still assumes margin improvement in FY18 (around 100bps) and forecast earnings growth of 23 percent YoY.

The brokerage house says Mindtree's earnings growth may be among the strongest in its coverage in F18 (after a sharp decline in FY17), but it believes the company needs consistent performance over the coming quarters for re-rating to historical levels.

Meanwhile, Credit Suisse has upgraded the stock to neutral with an increased target of Rs 450 as the stock has fallen 40 percent over the past year and both growth and margins appear to have bottomed out.

While Mindtree's current margins are very low and provide room for significant improvement, execution has been poor in the past two years and it needs to be seen whether that can reverse, says the brokerage house.

With a cut in earnings estimates by 7-10 percent, Credit Suisse says, "While we increase constant currency revenue growth estimates, we now assume Rs 65 per dollar versus the earlier Rs 66 per dollar and reduce margin expansion assumptions. We have also increased tax rate assumptions slightly, in line with management's guidance."

The stock price closed at Rs 449.50, up 1.64 percent on the BSE.

Posted by Sunil Shankar Matkar
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