Mindtree’s 4x4x4 strategy has some buyers & a few sceptics on D-Street

Mindtree’s 4x4x4 strategy has some buyers & a few sceptics on D-Street

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NEW DELHI: Along with pharma, the IT sector has been the biggest beneficiary of the Covid disruption, with some of the companies — especially those with a digital focus — making the most of the crisis.
One of them is a midcap firm, whose stock has gained nearly 80 per cent this year. The company has since outlined an ambitious plan to grow bigger building on the businesses acquired during the coronavirus crisis.

We are talking about Mindtree.

The management recently unveiled a new 4x4x4 strategy, which refers to four industry groups, four service lines and four geographies, reflecting an elevated focus on digital as three out of the four service lines are from that domain.

The company plans to create local teams and leadership in non-US geographies to sell industry capabilities to a wider client base. The management also announced plans to strengthen its consulting practice to better cross-sell new service lines to strategic clients.

So, can this strategy work for the company and catapult it into the league of TCS and Infosys?
Analysts agree this is an ambitious path, but are not too confident of the new strategy.

“The new strategy to expand regional focus and get into the healthcare vertical can be potential additions to its medium-term revenue aspiration of growing above industry growth. But increasing presence in Continental Europe and APAC would require an upfront investment, which can impact Mindtree’s near-term profitability (and dent margins),” said Mukul Garg, research analyst at Motilal Oswal.

He has a ‘neutral’ rating on the stock with price target of Rs 1,550, which means a potential upside of nearly 8 per cent from Monday’s close of Rs 1,443.

Edelweiss Securities analysts Sandip Agarwal and Pranav Kshatriya said Mindtree aspires to become the ‘go-to’ business partner for its clients, and thus it is doubling down the focus on large deals, increasing account coverage, having geo-focused leadership and leveraging partner ecosystem.

The analysts set a price target of Rs 2,044 on the stock, meaning an upside of 42 per cent, as they believe the company is in a sweet spot to capitalise on the mega opportunity since investments in digital are no longer discretionary in nature but essential for all firms.

Sudheer Guntupalli, an analyst at ICICI Securities, sounded confident of the company’s future growth, and estimated strong outlook on growth and margins. He said valuations at 19 times FY22 expected EPS are undemanding.

Guntupalli has a price target of Rs 1,810 on the scrip.

L&T acquired the company in a hostile takeover last year. As the capital goods giant already owns another firm in the same domain, there were speculation that there could be a merger. But the Mindtree management clearly said the company has no plans to merge with L&T Infotech.

However, Dipesh Mehta at Emkay Global has a ‘sell’ call on the stock with price target at Rs 1,330, suggesting a downside of nearly 8 per cent.

“The revenue performance of the business remains lop-sided with the top client driving over one-third of incremental revenue during FY14-20. We expect a steady performance for the top client. However, increased concentration and growth dependency remain a concern, [especially] given the limited success in broadening growth and rich valuations,” Mehta said.

The stock currently trades at 27.21 times its earnings and is more expensive than the likes of Mphasis and Persistent Systems, but cheaper than Tata Elxsi and Coforge.
Credit: Stocks-Markets-Economic Times

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