Mindtree shares shared their Q2’2021 result on 15th October 2020. The company has registered almost 88% growth in Net profit compared to the last year. Total profit earned is Rs. 254 Cr in the quarter. The Indian multinational company has completely focused on New Age technologies.
Even after a huge growth in net profit, the share price shed almost 7% today. The important reason behind this is,
- The revenue growth was not as expected. It was not a double-digit growth in terms of revenue.
- The revenue growth was negative compared to last year in USD.
- Continuous decrease in top contributing client base for the last two quarters.
Anyhow, the company and promoters are happy with the result. They have decided to provide,
- Salary hike effective 1st January 2020 for employees
- Interim dividend for investors.
Let us take some time to understand the real value of the business and the contradiction of share price.
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Business Overview – Mindtree Shares:
The 21-year-old company has transformed under the banner of “born digital” as a revenue generation of $1.1 Billion. Currently operating in 18 countries around America, Europe, and India with more than 21000 employees.
It has demonstrated a strong performance with
- Being a Strategic Partner for transformation journeys across the digital value chain.
- Strong leadership culture powered by internal and external platforms.
Demonstrated a strong strategy for the transformation. Their current strategies are,
- Building on existing strengths.
- Focus on strengths.
- Develop Strategic relationships and partnership
- Continue to Simplify, Differentiate, and Change.
Similar to other IT solution companies, their main focus is on the following sectors.
- Retail, Consumer Products, and Manufacturing.
- Banking, Financial Services, and Insurance.
- Travel, Transport, Logistics, and Hospitality.
- Communication, Media, and Technology
They are committed to offering the best services to their customers under 4 categories. They are,
- Customer Success
- Data and Intelligence
- Cloud
- Enterprise IT.
These 4 categories have vast services. It has advanced digital technologies like cloud technologies, AI, Data Analytics, Agile operations, Digital marketing and commerce, b2b Customer success, DevOps, IoT (Internet of Things), and Infrastructure Management.
Also, they produce world-class software and applications for customer’s success with
- Microsoft
- Oracle
- Salesforce
- SAP
Revenue Split Ups and Client Base:
The revenue of Q2’2021 is 261 USD Million, which is Rs. 1926 Cr INR.
The revenue split across business sectors is,
- Retail, Consumer Products, and Manufacturing – 21.5% vs 21.7% (Q2’2020)
- Banking, Financial Services, and Insurance – 20.4% vs 21.6% (Q2’2020)
- Travel, Transport, Logistics, and Hospitality – 8.3% vs 16.9% (Q2’2020)
- Communication, Media and Technology – 49.8% vs 39.8% (Q2’2020)
You can see, there is a huge growth in the Communication, Media, and Technology sectors. The CMT sector has managed the TTLH (Travel, Transport, Logistics, and Hospitality) sector. Due to the COVID-19 pandemic across the global lockdown, the TTLH industry is completely locked in revenue. This might be the exact reason for just 0.9% Q-o-Q growth in revenue.
Now, we can see the service wise revenue split up,
- Customer Success – 38.9% vs 41.8% (Q2’2020)
- Data & Intelligence – 14.2% vs 12.1% (Q2’2020)
- Cloud – 19% vs 14.5% (Q2’2020)
- Enterprise IT – 27.9% vs 31.6% (Q2’2020)
The geographical split-up of revenue seemed to be,
- North America – 77.4% vs 73.8% (Q2’2020)
- Europe – 7.5% vs 8.9% (Q2’2020)
- UK and Ireland – 7.9% vs 8.7% (Q2’2020)
- Asia Pacific – 7.2% vs 8.6% (Q2’2020)
Client Base:
- The number of active clients has been continuously shed off from 343 in Q2’2020 to 283 currently (Q2’2021).
- In Q2’2020, 14 new clients were added. But, In Q2’2021 only 8 new clients were added.
- The contribution from the Top 10 clients has sharply laid down to 49.4% compared to the previous quarter of 52%
- The total Contract value has reduced from $391 Million in Q1’2021 to $303 Million in Q2’2021.
Financial Performance – Mindtree Shares:
We will be analyzing the revenue, EBITDA, PAT, and EPS from 2015 to 2020, Q1’2021, and Q2’2021.
The above picture will clear idea of how the financial statistics have performed.
- Higher 5 years Revenue growth at a CAGR of 16.55% compared to the industry average. The Industry average 5 years growth is at a CAGR of 9.83%.
- Lower 5 years Net profit growth is lower than the industry average growth. The 5 years Net profit has grown at a CAGR of 3.3% compared to 8.06% of the industry average.
- Increased market share from 1.14% in 2015 to 1.56% in 2020.
Fundamental Analysis – Mindtree Shares:
- Total Number of Shares – 16.457 Cr shares
- Market capitalization – Rs. 21874.35 Cr
Valuation Ratios:
The basis of fundamental analysis is to check the valuation ratios of the share.
- Book value – Rs. 191.82
- Price to Book Value (P/B) – 6.93
- Earnings per share (TTM) – 52.84
- Price to Earnings (P/E) – 25.15 (Overvalued)
- Industry Average – 31.05
- Dividend Yield – 0.98%
- 5 years EPS Growth – 3.67%
- Debt to Equity ratio – 0%
- Current ratio (Assets/Liabilities) – 2.46
- Interest Coverage Ratio – 16.67%
- Return on Equity (ROE) – 19.99%
- Net profit Margin – 8.05%
- Free Cash Flow – 703.10 Cr
- Enterprise Value/EBITDA – 16.03 (Overvalued)
Shareholding Pattern:
- Promoters – 67.59%
- FII – 12.02%
- Financial Institutes – 0.3%
- Insurance Companies – 2.78%
- Mutual Fund – 8.66%
- Retail Investors – 6.77%
- Others – 1.87%
Excess Liquid Cash Per Share:
Total Liquid Asset
- Fixed Asset
-
- Investment: Rs. 6.7 Cr
- Other financial assets: Rs. 40.1 Cr
-
- Current Asset
-
- Investments: Rs. 1850.9 Cr
- Cash and Cash Equivalents: Rs. 212.9 Cr
- Other Financial Assets: Rs. 216 Cr
-
Total Liquid Assets: Rs. 2326.6 Cr
Total Liabilities: Rs. 1757.1 Cr
Excess Liquid Cash: Rs. 569.5 Cr
Excess Liquid Cash per Share: Rs. 34.6 per share.
Intrinsic Value:
It is necessary to calculate the intrinsic value of a share in a conservative approach as an intelligent investor.
- 5 year EPS growth is 3.67%
- 1 year EPS growth is 40.7%
- 5 years Revenue is 16.55%.
- 1-year revenue growth is just 0.9%.
The stock is 1.5 times high volatile than the Nifty Index.
So, we should be conservative and take the highest growth expected by 10% and the margin of safety by 10%. So, the Intrinsic value will be less than Rs. 800 per share
Insights to Investors:
- Perfect business plan and management. Completely focused on digital and advanced technologies.
- The revenue has fallen only in the Transport & Hospitality sector from 16.8% to 8%. The main reason is COVID.
- Luckily they have increased huge revenue and profit in Digital products.
- Even a few clients drop will not impact the business, as Digital and advanced technology has huge ROI. So the profit will increase as time moves on.
- The company promoter’s holding has reduced from 74.5% to 69%. This is a real concern when clients move out.
- Zero debt company with huge free cash flow and Excess liquid cash per share.
- Amid all the positives, the share is traded at 66% higher than the intrinsic value.