Sell Mindtree; target of Rs 700: Dolat Capital

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Dolat Capital's research report on Mindtree

Mindtree reported disastrous quarterly earnings with a muted revenue growth of 1.1% in CC terms and an OPM decline of over 650bps sequentially in Q1FY20. The revenue growth slip was on account of weaker-than-expected ramp-up on deals owing to the uncertainty around the management changes; while profitability took a blow as Mindtree made generous appraisals (announced one-time special rewards to employees as Mindtree celebrated completion of 20 years in operations of about ~` 450mn, on top of regular wage hikes) to its employees. The departing management reiterated the confidence on financial performance for FY20 and still expects company to deliver industry leading revenue growth and better profitability for FY20 on YoY basis. However, we do not subscribe to the same given the terrible start to the year and significant attrition at the Top leadership level (three founders and few other KMPs have resigned in last one month). We see that deteriorating financial performance and uncertainty around the Top-leadership could prolong the pain in its performance for some more time.

Outlook

Accounting for the steep earnings cuts (28%/11% for FY20/21e) and ascribing lower valuation multiple of 14x (earlier 16x) we have downgraded our rating on Mindtree to SELL with a TP of ` 700 valued at 14x FY21E earnings.

For all recommendations report, click here

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