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Mindtree: Forex loss hurts profits

Jan 16, 2014

Mindtree Ltd has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported a 2.7% quarter-on-quarter (QoQ) growth in sales but a 31% QoQ decline in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 2.7% QoQ during 3QFY14. This is on the back of a decent 2.5% QoQ growth in US Dollar terms.
  • The operating profits declined by 3.4% QoQ while operating margins fell by 1.3% QoQ to 19.5% compared to 20.8% seen during the previous quarter (2QFY14).
  • The company suffered a forex loss of Rs 272 m during the quarter. This was against a forex gain of Rs 199 m in the previous quarter. This lowered the profit before tax (PBT) by 28.3% QoQ.
  • The net profit for the company came in at Rs 888 m, lower by 31% QoQ.
  • Total number of active clients for the company stood at 208 as compared to 247 at the end of the previous quarter (2QFY14).

Snapshot of Financial Performance
(Rs m) 2QFY14 3QFY14 Change 9MFY13 9MFY14 Change
Sales 7,696 7,906 2.7% 17,494 22,079 26.2%
Expenditure 6,098 6,362 4.3% 13,793 17,746 28.7%
Operating profit (EBDIT) 1,598 1,544 -3.4% 3,701 4,333 17.1%
Operating profit margin (%) 20.8% 19.5%   21.2% 19.6%  
Other income (Including forex gain/loss) 248 (189)   9 794  
Depreciation 197 208 5.6% 469 586 24.9%
Interest 2 1 -50.0% 9 4 -55.6%
Profit before tax 1,647 1146 -30.4% 3,232 4,537 40.4%
Tax 360 258 -28.3% 628 1,008 60.5%
Profit after tax/(loss) 1,287 888 -31.0% 2,604 3,529 35.5%
Net profit margin (%) 16.7% 11.2%   14.9% 16.0%  
No. of shares (m)         41.6  
Diluted earnings per share (Rs)*         103.7  
P/E ratio (x)*         13.7  
*On a trailing 12-month basis

What has driven performance in 3QFY14?
  • In terms of industry verticals, Mindtree witnessed broad based growth across verticals. However in the high margin business of product engineering services (PES) the company saw a fall in revenues by 11.9%.

  • In terms of geographies, growth in the US was muted but the rest of the world witnessed good growth of 44.8% on a low base.

  • In terms of service lines, infrastructure management lent support to growth in this quarter while engineering services and IP revenues were a drag on the performance.

    Segmental summary
    Revenue Break-up (In Rs m) 2QFY14 3QFY14 Change
    On basis of industry vertical
    ITS-Manufacturing & Retail 1,447 1,700 17.5%
    ITS-BFSI 1,770 1,842 4.1%
    ITS-Travel, Media & Services 1,447 1,629 12.6%
    ITS-Other 608 593 -2.5%
    Product Engineering Services (PES) 2,424 2,135 -11.9%
    On basis of geography
    US 4,471 4,554 1.8%
    Europe 2,255 2,237 -0.8%
    India 462 372 -19.5%
    Rest of the world 508 735 44.8%
    On the basis of service offerings
    Development 1,947 2,000 2.7%
    Engineering 1,177 799 -32.2%
    Maintenance 1,655 1,874 13.2%
    Consulting 277 261 -5.8%
    Package Implementation 208 190 -8.7%
    IP Led Revenue 100 55 -44.7%
    Independent Testing 1,362 1,312 -3.7%
    Infrastructure Management & Tech Support 985 1,407 42.9%

  • In terms of operational performance, Mindtree witnessed a fall in operating profits by 3.4%. This was due to two factors: the appreciation of the rupee and higher employee costs due to wage hikes in the quarter.

  • At the net level, the bottom line fell by 31% QoQ. His was largely due to the forex loss of Rs 272 m in the quarter due to the rupee appreciation.
What to expect?
At the current price of Rs 1,422, the stock is trading at a multiple of 13.7 times of its trailing twelve months earnings. Mindtree had a muted quarter in 3QFY14. The revenues grew by 2.5% QoQ in US dollar terms.

The company continued with its strategy of mining its top clients. This has worked for it in this quarter. The US$ 5 m clients grew to 22 and the US$ 10 m grew to 6. The company will continue to focus on this strategy in the near future.

The management stated that they were not worried about the fall in operating margins as it was due to the appreciation in the rupee. Also the wage hikes in this quarter would not be repeated in the next quarter.

The management said that they were seeing good growth opportunities in the largest market the US but were still cautious about Europe.

Despite the poor performance of the hi-tech business, the management was confident about a pick up in the coming quarters.

The company's attrition fell yet again in the quarter to 11.6% compared to 11.9% in the previous quarter. The management has stated that they were confident about maintaining the same going forward.

The company's stock price has run up sharply in recent times. At the current price we believe that all the positives for the company are already factored in. We had recommended the stock in September 2013, when we suggested that investors should buy the stock at Rs 875 or lower. We maintain the same view.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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Jun 24, 2021 (Close)


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