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Mindtree: Operating performance remains strong - Views on News from Equitymaster
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Mindtree: Operating performance remains strong
Feb 9, 2015

Mindtree has announced results for the third quarter 2014-2015 (3QFY15). The company has reported a 2.6% quarter-on-quarter (QoQ) growth in sales and a 2.5% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 2.6% QoQ during 3QFY15. This is on the back of a rather muted 0.4% QoQ revenue growth in US dollar terms.
  • The operating profits increased by 6.3% QoQ while operating margins improved by 0.7% QoQ to 20.5% compared to 19.8% seen during the previous quarter (2QFY15). This was due a moderate fall (as a % of sales) in employee expenses as well as SG&A expenses.
  • The company had a forex gain of Rs 70 m during the quarter. This led to a healthy other income figure of Rs 210 m for the quarter.
  • Largely due to the good operating performance, the net profit increased by 2.5% QoQ.
  • The company has declared a dividend of Rs 4 per share.

Standalone financial snapshot
(Rs m) 2QFY15 3QFY15 Change 9MFY14 9MFY15 Change
Sales 8,886 9,117 2.6% 22,079 26,438 19.7%
Expenditure 7,131 7,251 1.7% 17,745 21,132 19.1%
Operating profit (EBITDA) 1,755 1,866 6.3% 4,334 5,306 22.4%
Operating profit margin (%) 19.8% 20.5%   19.6% 20.1%  
Other income (Including forex gain/loss) 241 210 -12.9% 792 661 -16.5%
Depreciation 235 260 10.6% 586 723 23.4%
Interest - 1   4 1  
Profit before tax 1,761 1,815 3.1% 4,536 5,243 15.6%
Tax 387 407 5.2% 1,008 1,167 15.8%
Profit after tax/(loss) 1,374 1,408 2.5% 3,528 4,076 15.5%
Net profit margin (%) 15.5% 15.4%   16.0% 15.4%  
No. of shares (m)         83.7  
Diluted earnings per share (Rs)*         60.4  
P/E ratio (x)*         22.4  
*On a trailing 12-month basis

What has driven performance in 3QFY15?
  • In terms of the operating metrics, the company witnessed good growth in the US geography, the manufacturing and BFSI verticals, as well as the engineering and package implementation services.

    Segmental performance
    Revenue Break-up (Rs m) 2QFY15 3QFY15 Change
    On basis of industry vertical
    Manufacturing, CPG & Retail 1,919 2,024 5.4%
    BFSI 2,026 2,142 5.7%
    Travel & Hospitality 1,520 1,477 -2.8%
    Hi-Tech & Media Services  2,906 2,981 2.6%
    Other 515 492 -4.5%
    On basis of geography
    US 5,367 5,753 7.2%
    Europe 2,319 2,206 -4.9%
    India 355 374 5.2%
    Rest of the world 844 784 -7.1%
    On the basis of service offerings
    Development 2,133 2,161 1.3%
    Engineering 835 939 12.4%
    Maintenance 1,884 1,951 3.6%
    Consulting 373 374 0.2%
    Package Implementation 480 529 10.2%
    IP Led Revenue 142 146 2.6%
    Independent Testing 1,377 1,404 1.9%
    Infrastructure Management & Tech Support 1,662 1,605 -3.4%

  • At the operating level, the company reported a strong performance. Wage hikes were completed in the quarter. However, this did not impact the margins adversely as expected. This was due to improved pricing, a big jump in the revenue contribution of fixed cost projects from 43.6% in 2QFY15 to 46.5% in 3QFY15 as well as the rupee depreciation against major western currencies.

  • At the net level, the good operating performance along with the forex gain resulted in an increase of 2.5% QoQ in the bottomline.
What to expect?
At the current price of Rs 1,355, the stock is trading at a multiple of 22.4 times of its trailing twelve months earnings.

The management stated that the company's growth strategy is well on track. Clients have not said anything negative about budgets for FY16. In fact, clients in customer facing industries are very positive about new digital technologies. The company signed deals worth US$ 152 m in the quarter out of which renewals were worth US$ 106 m.

33% of the company's revenues now come from newer digital technologies. Deal sizes have increased by 15% recently as per the management. The deal pipeline in this space is strong and the company's top clients are investing in it. To handle the growth, Mindtree will hire about 2,000 employees via campus placements in FY16. In FY15 the final number will be about 1,000.

In 3QFY15, volumes fell by 1.5% QoQ (due to seasonality). However, this was more than compensated by stronger pricing by 2.1% QoQ. This aided the sequential margin improvement. The management stated that margins will remain stable in the near future and that they would try to optimize which ever margin lever they believe is possible.

Mindtree has acquired Discoverture, a US based provider of IT solutions to the insurance industry in a 100% all cash deal worth US$ 15 m. The payout will be over 18 months with performance incentives built in. Discoverture has 300 employees in the US, UK Canada & India of which 230 are based in India. Most of remaining 70 employees are based in the US. Mindtree will acquire 15 large clients in the insurance space with this acquisition. The company clarified that there will be minimum customer overlap. Discoverture's margins are in line with Mindtree's margins and the company has grown at 20-25% growth historically. The management of Discoverture has been retained. This acquisition will strengthen the company's prospects in the fast growing insurance business globally.

The long term growth prospects of Mindtree remains strong. However, at these levels the valuations of the stock are stretched. Thus, we maintain our view that investors should not buy the stock at these high valuations.

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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