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Mindtree: A dull end to a strong year - Views on News from Equitymaster
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Mindtree: A dull end to a strong year
Apr 21, 2015

Mindtree has announced results for the fourth quarter and full year 2014-2015. The company has reported a 0.7% quarter-on-quarter (QoQ) growth in sales and an 8.6% QoQ fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 0.7% QoQ during 4QFY15. This is on the back of an extremely muted 0.1% QoQ revenue growth in US dollar terms. For the full year FY15, sales were up 17.5% YoY in rupee terms and 16.4% YoY in dollar terms.
  • The operating profits decreased by 4.3% QoQ while operating margins fell by 1% QoQ to 19.5% compared to 20.5% seen during the previous quarter (3QFY15). This was largely due a 2.7% QoQ rise in employee expenses in 4QFY15.
  • The company had a forex loss of Rs 130 m during the quarter. This led to a fall in the other income by 17.1% QoQ.
  • Largely due to the muted operating performance, the net profit decreased by 8.6% QoQ. For the full year FY15, the net profit increased by 19% YoY.
  • The company has declared a final dividend of Rs 10 per share for FY15.

Consolidated Financial Snapshot
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 9,117 9,181 0.7% 30,316 35,619 17.5%
Expenditure 7,251 7,395 2.0% 24,216 28,527 17.8%
Operating profit (EBITDA) 1,866 1,786 -4.3% 6,100 7,092 16.3%
Operating profit margin (%) 20.5% 19.5%   20.1% 19.9%  
Other income (Including forex gain/loss) 210 174 -17.1% 496 835 68.3%
Depreciation 260 295 13.5% 809 1,018 25.8%
Interest 1 -   4 1  
Profit before tax 1,815 1,665 -8.3% 5,783 6,908 19.5%
Tax 407 378 -7.1% 1,275 1,545 21.2%
Profit after tax/(loss) 1,408 1,287 -8.6% 4,508 5,363 19.0%
Net profit margin (%) 15.4% 14.0%   14.9% 15.1%  
No. of shares (m)         83.7  
Diluted earnings per share (Rs)*         64.0  
P/E ratio (x)*         19.0  
*On a trailing 12-month basis

What has driven performance in 4QFY15?
  • In terms of the operating metrics, the company witnessed good growth in the US geography, the BFSI vertical, as well as the package implementation service. However, this can be largely attributed to the acquisition of Discoverture a US based IT services provider in the Insurance industry.

    Segmental performance
    Revenue Break-up (Rs m) 3QFY15 4QFY15 Change
    On basis of industry vertical
    Manufacturing, CPG & Retail 2,024 1,992 -1.6%
    BFSI 2,142 2,295 7.1%
    Travel & Hospitality 1,477 1,469 -0.5%
    Hi-Tech & Media Services  2,981 2,993 0.4%
    Other 492 432 -12.4%
    On basis of geography
    US 5,753 5,958 3.6%
    Europe 2,206 2,176 -1.4%
    India 374 331 -11.6%
    Rest of the world 784 716 -8.7%
    On the basis of service offerings
    Development 2,170 2,130 -1.8%
    Engineering 939 918 -2.2%
    Maintenance 1,951 1,910 -2.1%
    Consulting 374 358 -4.2%
    Package Implementation 529 689 30.2%
    IP Led Revenue 146 156 7.0%
    Independent Testing 1,404 1,414 0.7%
    Infrastructure Management & Tech Support 1,605 1,607 0.1%

  • At the operating level, the company reported a weak quarterly performance. The strength of the US dollar in the quarter dampened both the topline as well as the operating margin in 4QFY15. The management stated that they had not anticipated such a sharp appreciation of the dollar.

  • At the net level, the weak operating performance along with the forex loss resulted in an 8.6% QoQ decline in the bottomline. However, in the full year FY15 Mindtree's net profit increased 19% YoY while the net margin improved marginally by 0.2% on a YoY basis.
What to expect?
At the current price of Rs 1,214, the stock is trading at a multiple of 19 times of its trailing twelve months earnings.

Mindtree has completed a very good year. Revenues in US dollar terms were up 16.4% YoY while margins remained stable. The company's deal wins and client metrics improved in FY15. While volume growth was 10.8% YoY, utillisation (excluding trainees) improved to 71.1%. The management stated that there was scope to improve utillisation going forward as well.

The management stated that they would deliver topline growth higher than NASSCOM's industry estimate of 12-14% YoY for FY16. However, they indicated that margins would be lower in FY16 compared to FY15 despite better utillisation. This would be due to higher investments the company will have to make in training of employees, developing its sales teams as well as developing new digital software platforms that have witnessed an exponential growth in demand in recent times.

The management also stated that the various efforts taken to bring attrition under control are beginning to payoff. The attrition stood at a high 18.2% at the end of FY15. However, this is expected to reduce going forward.

The company completed the acquisition of Discoverture in the quarter. The full synergies of this acquisition will be seen in FY16. However, the organic growth momentum also continues to remain strong. The company has sufficient revenue visibility and certain client specific issues are not a cause for much concern.

Mindtree has completed a mega restructuring of its senior management effective 01 April 2015 involving around 40 senior management positions. This has been done to groom future leaders for key leadership roles in the long term as well as to better position the company to take advantage of the huge opportunity presented by digital technologies. This has led to a number of senior staff leaving the firm recently. However, the management sounded confident that the restructuring has been a smooth and natural process and also expressed confidence in the younger leadership.

The long term growth prospects of Mindtree remains strong. However, in the short term there are headwinds. Wage hikes to control attrition, higher visa costs, significant investments in developing digital software platforms, higher training as well as sales and marketing expenditure will all take a toll on the bottomline. However, we do not foresee significant erosion in margins beyond FY16.

At these levels, the valuations of the stock are stretched. Thus, we maintain our view that investors should wait for better valuations before entering the stock.

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