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Mindtree likely to report drop in Q2 profit on year-on-year basis

IT services company Mindtree is expected to report a year-on-year drop in profit, but the bottom line may climb sequentially thanks to better margins.

Kotak Securities expects it to post 2.2 per cent revenue growth for the quarter in constant-currency terms. “Revenue growth will be broadbased across verticals at Rs 1,896 crore, up 8 per cent YoY and 3.4 per cent QoQ,” the brokerage said. It expects revenues from the largest client to grow as well.

EBIT margin for June quarter, 2019, was abnormally low and impacted by one-time bonus paid to employees that affected EBIT margin by 260 bps. In addition, visa costs also had an impact on margins by 30 bps.

Kotak expects EBIT margin to increase 300 bps largely on rupee depreciation and absence of one-off items. Another salary revision will eat into some of the margin levers. It expects profit to come down 33 per cent YoY to Rs 137 crore

PhillipCapital expects constant currency revenue growth of 2.7 per cent and negative cross-currency impact of 40bps in September quarter. The brokerage said margins may expand 360bps QoQ due to the absence of one-time bonus paid in last quarter and rupee depreciation.

PhillipCapital pegs dollar revenue at $270 million, up 2.3 per cent sequentially. Similarly, it expects 3.7 per cent QoQ and 8.4 per cent YoY growth in revenue to Rs 1,902 crore. EBIT margin is expected at 10%, up 360 bps QoQ and down 310 bps YoY.

The brokerage projected a profit figure of Rs 145 crore, up 57 QoQ but down 29 per cent YoY. It said the commentary on digital growth and TCV should be keenly watched.

“TCV of deal wins will improve after being muted in the earlier quarters. Deals were held up in earlier quarters due to lack of clarity on ownership structure, something which has been resolved and will reflect in higher deal closures,” Kotak said.

BNP Paribas pegs Mindtree’s dollar revenue for the quarter at $270 million, up 2.3 per cent QoQ. Revenue in rupee terms is expected to be Rs 1,898 crore, up 3.5 percent QoQ. The brokerage expects EBIT to be Rs 205 crore, up nearly 25 per cent. It also expects the EBIT margin to climb 182 bps to 10.8 per cent. Net income is expected to jump 80 per cent to Rs 1,667 crore.

Investors should watch out for (1) management changes following L&T's acquisition of Mindtree, (2) attrition rate and talent retention strategies, (3) growth outlook of the top client, (4) margin outlook given that it will be an important focus for the parent, (5) deal wins and (6) duration of independent charter for Mindtree before it is folded into LTI.
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