Here's how Microsoft layoffs affect a $1.3 billion Indian software exporter

Mindtree may have surprised the Street with a strong quarterly performance, but analysts fear layoffs in Microsoft might hurt growth in the firm's top vertical. Mindtree — India's seventh largest software exporter by market value — is a partner of Microsoft, offering a slew of solutions through the US giant's platforms and technologies.

This week, Microsoft cut 1,800 jobs in a move aimed at realigning its business groups and roles after the year ended June 30. The IT giant said it would continue to hire for other roles and finish the current fiscal year with an increased headcount.

"Microsoft has cut jobs after five years. The job cutting is quite less at around a percent of their total employees (1.8 lakh). The last time it was done was in 2016-17 and 2017-18. We have seen a bit of moderation happen in Mindtree’s top client vertical," Aniket Pande of ICICI Securities told CNBC-TV18.

He believes the Bengaluru-based IT company will be able to do well for the next couple of quarters though concerns persist on the macroeconomic front.

Mindtree enables Cloud, data and intelligence, customer success, and enterprise IT solutions through Microsoft platforms and technologies, according to its website.

Mindtree — which clocked a sales growth of 32 percent to Rs 10,210 crore for the year ended March 2022 ($1.3 billion at $1 = Rs 79.73) — is the only Indian IT company to exceed analysts' expectations in the current earnings season, especially on the margin front.

That at a time when most IT companies are scrambling to protect their margins amid high employee costs, thanks to elevated levels of attrition, even as revenue growth remains strong due to rapidly increasing spends on technology across sectors.

Mindtree said its attrition rate worsened to 24.5 percent in the three-month period, from 23.8 percent in the March quarter.

ICICI Securities maintained a 'hold' rating on Mindtree after the earnings announcement.

The brokerage expects the midcap IT company's earnings per share (EPS) — or the amount of money a company generates for each share— to be resilient for the remainder of the year ending March 2023.

Mindtree CEO Debashis Chatterjee told CNBC-TV18 that the company expects a margin above 20 percent for the year ending March 2023 despite wage hikes in the quarter ending September 2021. "Mindtree is cautiously optimistic about the second half of the year," he said.

Mindtree's robust performance — wherein the software firm beat analysts' forecasts on profit, revenue margin as well as margin — comes at a time when the rupee has hit a series of lifetime lows against the greenback.

Weakness in the rupee against the greenback boosts the profitability of IT companies such as Mindtree, as it increases the worth of their earnings in foreign markets such as the US — the biggest market for the Indian IT sector.

Pande said the rupee poses an upside risk to Mindtree's earnings per share (EPS), and the macroeconomic environment a downside one. He expects a revision in its EPS estimates by 2.3-3 percent if the rupee stays in a range of 79-80 against the greenback for the next 2-3 quarters.

Mindtree shares are among the worst hit in the current bear phase in the IT basket. A stock or index is said to be in the bear zone once it retreats more than 20 percent from its recent peak.

Analysts see up to 27.6 percent upside in the Mindtree stock.

ICICI Securities has a target price of Rs 3,700 on Mindtree shares. Kotak Securities sees their fair value at Rs 3,150 — indicating an upside of 8.6 percent from Wednesday's closing price.

Sunny Agrawal of SBI Securities told CNBC-TV18 he prefers midcap stocks within the IT basket. "The overall IT pack has corrected significantly over the last 6-9 months, whether it is largecaps or midcaps. Growth in the long-term remain at above a 15-20 percent CAGR in the midcap IT space as against 10-12 percent in the largecap IT pack," he says.

He suggests buying the dip in midcap IT from a long-term perspective to expect a return of 15-20 percent over the next 12 months.