September quarter’s impressive revenue growth was also accompanied by an 80 bps improvement in operating margin. Photo: Hemant Mishra/Mint
Mindtree Ltd’s shares have risen 14% in the past three months, while the CNX IT index has been more or less flat. Investors clearly liked the 4.5% sequential growth in organic revenues for the June quarter, despite the accompanying 190 basis points (bps) drop in operating profit margin.
In the September quarter, organic revenues rose by as much as 8.1%, which according to the company makes it the best quarter in the past six years. Year-on-year (y-o-y) growth jumped from 9.3% in the June quarter to 13.6% in the September quarter. As such, the company’s stated aim of beating Nasscom’s 12-14% growth projection looks far more attainable.
Investors may well cheer the results when trading resumes on Friday. After all, last quarter’s impressive revenue growth was also accompanied by an 80 bps improvement in operating margin. In fact, last quarter’s results included the full impact of the company’s two recent acquisitions, which should have dragged down margins. On an organic basis, margins rose by about 150 bps, with currency-related gains accounting for about two-thirds of this, and the rest coming from operating efficiencies.
According to Mindtree, digital services grew by 9.6% sequentially and the average contract value of these offerings rose from $220,000 in the June quarter to $448,000 last quarter. Also, it stated that more than half of its $193 million worth contract signings last quarter were in the digital space. Mindtree claims that 36.6% of its revenues now comes from this space.
According to an analyst with a leading institutional brokerage firm, different companies use different definitions, leading to variations in the metrics shared on digital offerings. Nevertheless, it does look like Mindtree is riding the digital wave fairly well.
As is the norm with most IT services companies, Mindtree expects growth to taper in the second half. But even if it grows organic revenues by a mere 1% sequentially, y-o-y growth will be over 14%. The huge beat in the past two quarters has clearly reduced the asking rate of growth for the remaining two quarters.