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Mindtree: Conference call excerpts

Mar 3, 2010

We recently had a conference call with the management of Mindtree, a mid-tier IT services exporter in order to discuss the company’s 3QFY10 performance. Besides discussing the drivers of performance during 3QFY10, the management also highlighted Mindtree’s expansion plans and medium term revenue growth prospects. The following are the key takeaways of the conference call. Company overview: Mindtree is a mid-tier Indian IT company headquartered in Bangalore. Since its conception in 1999, its has grown steadily and has now become a global IT service provider specializing in IT services, infrastructure management, technical support, knowledge services and product engineering. It was ranked 45th among the leaders in the 2009 Global Outsourcing 100 by the International Association of Outsourcing Professionals.

Performance in 3QFY10: Mindtree witnessed a margin contraction of 1.1% QoQ during 3QFY10 due to the lower number of working days last quarter. More number of employees taking leaves during the year end also impacted profitability. Around 73% of the company’s revenue came from Time and Material kind of engagement wherein the clients are billed for the efforts put. A decrease of 5 days impacted company’s operating profits by 3.2%. Another reason for margin contraction was the significant ramp up in India business of the company. Mindtree’s revenues from India which contributed over 6% to company’s sales in 3QFY10 grew by 27% QoQ. However, as the projects in domestic IT market are usually lower priced as compared to elsewhere, Mindtree saw a margin decline.

Investments in knowledge transitions for these products together with intake of 160 campus recruits were also responsible for lower margins. Nevertheless, the company managed to curb further decline despite unfavorable currency appreciation. The management believes that going forward the margins should remain stable at over 16%. At the net profit level, the company was largely aided by a huge gain in foreign exchange.

Business Environment: The management believes that the quarter saw a marginal improvement in market sentiments, with clients sending better indications about their future IT spending. Though these are early indications, the company has revamped its efforts in mining clients and for more business from its existing clients. The company also added 35 new customers during the quarter taking its customer base to 253. However the developed markets of the US and Europe showed muted recovery.

Expansion plans and guidance: Mindtree’s recent acquisition of Kyocera Wireless India (KWI, now Mindtree Wireless Pvt. Ltd.) has started to show synergy. It contributed positively to company’s financial performance during the quarter. Its latest revenue guidance for FY10 stands in the range of Rs 12,777 m to Rs 12,825 m. Net profits are expected to be in the range of Rs 1,920 m to Rs 1,956 m with an annual EPS of around Rs 48.6 to Rs 49.5. The company has informed that on account of market dynamics, it will be discontinuing the policy of giving guidance from 2011.

Going forward the company is planning to revamp its presence in Asia Pacific, Middle East and India. It recently indicated an increased focus on UAE’s IT market which is estimated to be growing at 7% annually to reach US$ 1 bn by 2011. In its target markets, Mindtree plans to ramp up its sales force, reinforce strategic partnerships with local companies and focus on specific segments like government and the manufacturing industry. It has also hinted of plans to raise debt upto US$ 100 m soon, which we believe will go towards these initiatives and inorganic foray.

What to expect?

At current price of 528, the stock is trading at a multiple of 6.9 times our estimated FY12 earnings. Like most other mid-tier IT companies, Mindtree registered a muted performance in 9mFY10 on account of dip in IT spending amongst its customer base. It has indicated a similar performance in 4QFY10, which has even lesser working days. Given Mindtree’s 9mFY10 performance and FY10 guidance, we would have to slightly revise our full year FY10 estimates downwards. 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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