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MindTree: Other income aids bottomline
Apr 17, 2008

Performance summary
  • Topline grows by 9% QoQ during 4QFY08, 24% YoY during FY08. Growth aided by strong performance from the IT service segment, which grew by 29% YoY during the fiscal. Topline higher by just about 2% as compared to our estimates.
  • Operating margins contract by 1.5% YoY during FY08, expand by 1.6% QoQ during 4QFY08.

  • Adds 23 new clients and 488 employees during 4QFY08; attrition rate drops to 15.8% (16% in 3QFY08).

  • Recommends dividend of Rs 2 per share (dividend yield 0.4%)

Financial performance: A snapshot…
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 1,865 2,039 9.3% 5,904 7,338 24.3%
Expenditure 1,545 1,656 7.2% 4,807 6,080 26.5%
Operating profit (EBDIT) 320 383 19.5% 1,096 1,258 14.7%
Operating profit margin (%) 17.2% 18.8%   18.6% 17.1%  
Other income 35 81 133.9% 74 278 277.0%
Depreciation 89 101 13.0% 244 349 43.0%
Interest 16 16 0.6% 30 59 96.6%
Profit before tax 250 348 38.9% 896 1,127 25.9%
Tax 42 (9)   (5) 85  
Profit after tax/(loss) 208 356 71.1% 900 1,042 15.7%
Net profit margin (%) 11.2% 17.5%   15.2% 14.2%  
No. of shares (m)         37.9  
Diluted earnings per share (Rs)         27.5  
P/E ratio (x)         17.4  

What has driven performance in 4QFY08?
  • MindTree recorded a 9.3% QoQ growth in topline during 4QFY08, aided by IT service segment which grew by 12.1% QoQ. The segment grew sales by 29% YoY during the full year. Growth in this segment was mainly driven by independent testing, business intelligence, package implementation, infrastructure management and tech support businesses. The second services segment of the company – R&D – recorded a marginal decline of 0.2% QoQ in sales, though these grew by 11% YoY during the full year. The management has indicated that performance of the R&D segment is generally volatile as revenues are mostly project based and the company is catering to start-up businesses. We vouch for that as has been seen in case of other companies operating in this stream of business. For the current fiscal (FY09), the management estimates the R&D segment to grow sales by 25% YoY. MindTree added 23 new clients and 488 employees (gross) during the fourth quarter, thereby taking the total employee strength to 5,640 at the end of March 2008. The attrition rate has declines to 15.8%, as compared to 16% in 3QFY08.

    Segmental Performance
    (Rs m) FY07 FY08 Change
    IT Services-Revenues 4,459 5,730 28.5%
    % of total revenues 75.5% 78.1%  
    PBIT margins 19.5% 18.8%  
    R&D Services-Revenues 1,445 1,609 11.4%
    % of total revenues 24.5% 21.9%  
    PBIT margins 17.6% 11.4%  
    Total Revenues 5,904 7,338 24.3%

  • MindTree’s operating margins expanded by 1.6% QoQ during 4QFY08 aided by controlled SG&A expense and better utilisation. Margins for FY08, however, declined by 1.5%, largely owing to the rupee’s 11% YoY appreciation against the US dollar. The management has estimated an expansion in operating margins on the back of volume and price growth coupled with better utilisation.

  • MindTree’s net profit grew by 71% QoQ during 4QFY08, largely aided by a sharp rise in other income and a deferred tax credit. For FY08, the bottomline growth stood at 16% YoY, with net profits being 9% higher than what we had estimated.

What to expect?
At the current price of Rs 480, the stock is trading at a multiple of 12.6 times our estimated FY10 earnings. The management has indicated 24% to 29% YoY growth in revenues (in US dollar terms) during FY09. The net profit estimates stand at 23% to 29% YoY. This growth is expected on the back of sustenance in volume growth and stable realisations. It is not expecting any major impact of the US credit crisis on its business as the company derives just around 25% of its sales from the banking and financial services segment. The company is expecting robust business growth coming from increasing outsourcing trend in new segments like mid-size local banks in the US, Europe and Japan. We shall soon update our research report on the company.

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