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Mindtree: Hurt by seasonality

Jan 20, 2011

Mindtree announced 3QFY11 results. Its topline saw a marginal increase of 0.1% QoQ while net income grew by a whopping 31% during the quarter.

Performance summary
  • Net sales grow by 0.1% QoQ during 3QFY11.
  • Operating margins declined by 0.4% QoQ due to higher operating expenses.
  • Adds 30 new clients during the quarter thus taking the total number of active clients to 269.
  • Trailing 12 months attrition increased to 24.2% during the quarter from 21.9% reported in the previous quarter (2QFY11).

(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 3,844  3,848 0.1%  9,516 11,179 17.5%
Expenditure 3,380  3,399 0.6% 7,693 9,841 27.9%
Operating profit (EBDIT) 464 449 -3.2%  1,823 1,338 -26.6%
Operating profit margin (%) 12.1% 11.7%   19.2% 12.0%  
Other income  25  95 280.0%  573 141 -75.4%
Depreciation  177  206 16.4%  488 528 8.2%
Interest   -  1    25 2  
Profit before tax 312  337 8.0%  1,883 949 -49.6%
Tax  80  33 -58.8%  279 253 -9.3%
Profit after tax/(loss)  232  304 31.0% 1,604 696 -56.6%
Net profit margin (%) 6.0% 7.9%   16.9% 6.2%  
No. of shares (m)       39.3  39.9  
Diluted earnings per share (Rs)*         31.1  
P/E ratio (x)*          17.5  
* On a trailing 12-month basis

What has driven performance in 3QFY11?
  • Mindtree recorded a 0.1% QoQ growth in net sales during the quarter. The main reason for this was that volumes remained flat during the quarter on account of lower number of billing days as well as year-end budget pressures from clients. The impact of lower number of working days was approximately 2% QoQ. Pricing increased by 3.6% QoQ. This was mainly on account of a one-time licensing revenue of US$ 0.6 m. The management expects billing rates to remain stable with an upward bias. It also expects a higher traction in revenue growth for the entire year.

  • Mindtree's verticals witnessed a mixed performance. Revenues from BFSI, Manufacturing and R&D witnessed growth of 12%, 8%, and 2% QoQ respectively. However, revenues from ‘Software Product Engineering' and ‘Travel & Transportation' witnessed sequential declines of 8% and 6% QoQ respectively. The management has stated that the company is witnessing some traction in the BFSI segment as larger companies are expanding their outsourcing business to include more vendors and are also ramping up their IT spend.

  • In terms of geographies, Mindtree saw a growth of 8% QoQ in its business from Europe. Revenues from the US and India witnessed declines of 4% QoQ and 1% QoQ respectively. Revenues from the rest of the world increased by 14% QoQ during the quarter.

    Segmental Performance

    Revenue Break-up (In Rs m) 2QFY11 3QFY11 Change
    On basis of segment       
    IT Services-Revenues  2,191  2,282 4.1%
    Product Engineering Services   1,653  1,566 -5.3%
    On basis of industry vertical      
    Manufacturing 538  581 8.0%
    BFSI 696 777 11.7%
    Travel and transportation 484  454 -6.3%
    R & D 454  462 1.8%
    Software Product Engineering (SPE) 1,003  924 -8.0%
    Other 669 650 -2.8%
    On basis of geography      
    US 2,426  2,324 -4.2%
    Europe 692 747 7.9%
    India 327  323 -1.1%
    Rest of the world 400  454 13.6%

  • Mindtree's management decided to discontinue its 3G phone business in the previous quarter. During the current quarter, the management carried out the amalgamation and the restructuring of the erstwhile NIW segment. The total restructuring cost stood at US$ 3.7 m of which US$ 3.2 m was related to direct costs and the balance was on account of goodwill write-off. Going forward, the management expects the restructured business to yield healthy results. The company already has its first customer for this business.

  • Mindtree added 30 new clients during the quarter. It added 87 employees (net), thereby taking the total strength to 9,671. However, attrition rate increased to 24.2% at the end of December 2010.

  • Mindtree's operating margins declined by 0.4% QoQ during the quarter. This was on account of restructuring costs related to the NIW business. Going forward the management expects its margins to improve on account of higher revenue traction as well as the absence of restructuring costs.

What to expect?
At the current price of Rs 544, the stock is trading at a multiple of 9.8 times our estimated FY13 earnings. The management is optimistic on the macro-economic scenario, and has indicated that it expects margins to pick up during the balance of the year. This would be aided by better revenue growth and higher employee utilisation. Margins are also likely to be aided by the discontinuation and restructuring of the erstwhile phone business. We had recommended the stock in November 2008, and it has already crossed our target price since then. At the current valuations, we believe the stock is fairly priced.

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