Mindtree reported its third quarter and nine months results for the 2016. They reported 31% growth in its revenues compare to last year quarter and 26% so far for the nine months results compare to last year.

Operating profit margin before taxes for the quarter stands at 16% and for the nine months at 17%. This decline is mainly because of the cost of employees and sub-contractors working on behalf of them. They reported profit growth of 7% compare to last quarter and 10% for the nine months results so far.

It looks Mindtree will hit consensus estimate of Rs 72.50 per share for the year end 2016 easily. But then consensus expects its earnings for 2017 to grow by 18% as of today, this is where you will have to do a bit research and be confident before you invest that they can achieve it.

This is how we interpret their results, we expect its ROE for the year 2016 to be 27% which is anyhow 2% below its 2015 returns. Talking on per share basis, they had paid dividends of Rs 17 per share to its shareholders and reinvested remaining Rs 47 back in the business and that extra capital will fetch Rs 8.35 extra profit this financial year. That represents 18% return on incremental capital invested in 2015.

It looks Mindtree management are very well aware of the challenges they are facing to grow their earnings. They had implemented the strategy to buy or acquire other business and create synergy and grow the earnings. But this strategy goes well only if the management are efficient capital allocator and not pay too much to acquire other businesses. If other businesses and synergies do not generate more than 27% return then they are not doing enough to add value for the shareholders. The other alternative for them is to work towards growing their margins and fill the gaps what they are building by acquisitions.

There are few changes that are happening within Mindtree. Rostow Ravanan who is the executive director will be taking a new role as a CEO and managing director from 1st April. We will be following updates very closely of this business as we own few shares from last 3 years.

On valuations point of view Mindtree today is trading at 21 times to its 2016 earnings (PE ratio). And as per consensus expectation of 2017 at 17.50 times PE ratio. We think it is trading at premium price and at these levels we are not interested to accumulate.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise to take professional advice before going ahead with our views.