JM Financial recommended hold rating on Mindtree with a target price of Rs 940 in its research report dated July 18, 2018.
JM Financial's research report on Mindtree
Mindtree (MTCL) yet again surprised positively with a 6.8% QoQ USD revenue growth driven by a 16.4% QoQ growth in the Top client; part of the beat on expectations was also due to changes in revenue recognition policies. Despite this, EBITDA was weak (-2% QoQ) and below estimates likely due to unexpectedly higher CSR expenses. Further, lengthening of the working-capital cycle affected the operating cash-flows in the quarter. Management is confident of both revenue growth and margins improving in FY19 though sequential growth in 2QFY19 is likely to be only modest. As such, revisions in our FY19/FY20 EPS are relatively minor (5%/3%) despite the sharp revenue beat in 1QFY19. We recognise MTCL’s attractive positioning within the Top client and in the broader digital services which reflects in our above-consensus estimates.
However, the lop-sided growth profile remains our key concern - the top client is now c.20% of revenues and accounted for 0.40% of incremental revenues over the last 4 quarters – that the stock’s rich valuations (20x+) appear to be ignoring. HOLD.
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