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Mindtree: Hurt by loss due to restructuring - Views on News from Equitymaster

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Mindtree: Hurt by loss due to restructuring
Apr 26, 2011

Mindtree has announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported a 1.7% QoQ and 4.9% QoQ growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 1.7% QoQ during 4QFY11. The revenue growth was mainly volume driven. Pricing was flat during the quarter. For the year ended March 2011, sales grew by 16.4% YoY.
  • Operating margins declined by 0.5% QoQ due to higher operating expenses (as a percentage of sales). For the full year FY11, operating margins declined to 11.8% from the 19.0% seen for the same period last year.
  • Net profit grows by 4.9% QoQ during the quarter. This was mainly driven by lower depreciation expenses during the quarter. For the full year FY11 (year ended March 2011), net profits declined by 52.7% YoY.
  • Adds 39 new clients during the quarter, thus taking the total number of active clients to 277.
  • Trailing 12 months attrition increased to 25.1% during the quarter from 24.2% reported in the previous quarter (3QFY11).
  • Proposed a final dividend of Rs 1.25 per share (yield of 0.3%).


Financial performance: A snapshot...
(Rs m) 3QFY11 4QFY11 Change FY10 FY11 Change
Sales 3,848 3,912 1.7% 12,960 15,090 16.4%
Expenditure 3,399 3,472 2.1% 10,504 13,312 26.7%
Operating profit (EBDIT) 449 440 -2.0% 2,456 1,778 -27.6%
Operating profit margin (%) 11.7% 11.2%   19.0% 11.8%  
Other income (Including forex gain/loss) 95 101 6.3% 770 242 -68.6%
Depreciation 206 184 -10.7% 652 712 9.2%
Interest 1 2   27 4  
Profit before tax 337 355 5.3% 2,547 1,304 -48.8%
Tax 32 35 9.4% 399 288 -27.8%
Profit after tax/(loss) 305 320 4.9% 2,148 1,016 -52.7%
Net profit margin (%) 7.9% 8.2%   16.6% 6.7%  
No. of shares (m)       39.5 40.0  
Diluted earnings per share (Rs)*         25.4  
P/E ratio (x)*         15.4  
* On a trailing 12-month basis

What has driven performance in 4QFY11?
  • Mindtree recorded a 1.7% QoQ growth in net sales during the quarter. The main reason for this lower growth rate was restructuring of smart phone product business into service oriented business. Excluding the loss due to restructuring, net sales grew by 4.0% sequentially. The growth was largely volume driven.

  • In terms of business segments, IT Services registered a growth of 6.1% QoQ. However, there was a decline of 4.8% QoQ in Product Engineering Services segment.

  • Mindtree's verticals witnessed a mixed performance as well. Revenues from 'Manufacturing' and 'Software Product Engineering' witnessed growth of 7.7% QoQ and 3.4% QoQ respectively. Revenues from 'BFSI and 'Travel & Transportation' witnessed a sequential growth of 2.2% and 0.8% QoQ respectively as well. However, revenues from 'Others (including wireless services)' and 'R & D' witnessed sequential declines of 4.4% and 0.9% QoQ respectively.

  • In terms of geographies, Mindtree saw a flat growth of 1.0% QoQ in its business from US (60% of net sales). Revenues from the Europe and India witnessed declines of 14.8% QoQ and 8.9% QoQ respectively. However, revenues from the rest of the world declined by 21.6% QoQ during the quarter. This was mainly due to loss of the business from Kyocera, a key client based out of Kyoto, Japan.

    Segmental Performance
    Revenue Break-up (In Rs m) 3QFY11 4QFY11 Change
    On basis of segment      
    IT Services-Revenues 2,282 2,422 6.1%
    Product Engineering Services 1,566 1,490 -4.8%
    On basis of industry vertical      
    Manufacturing 581 626 7.7%
    BFSI 777 794 2.2%
    Travel and transportation 454 458 0.8%
    R & D 462 458 -0.9%
    Software Product Engineering (SPE) 924 955 3.4%
    Other 650 622 -4.4%
    On basis of geography      
    US 2,324 2,347 1.0%
    Europe 747 857 14.8%
    India 323 352 8.9%
    Rest of the world 454 356 -21.6%

  • Mindtree added 39 new clients during the quarter. On net basis, total employee strength declined by 124, thereby taking the total strength to 9,547. Attrition rate also increased to 25.1% at the end of March 2011 as compared to 24.2% reported in the previous quarter (3QFY11).

  • Mindtree's operating margins declined by 0.5% QoQ during the quarter. The main reasons for the margin decline was the revenue decline from one large customer as well as small increases in onsite revenue and sub-contractor cost. For the full year FY11, operating margins declined to 11.8% from the 19.0% seen for the same period last year. This was due to higher operating as well as restructuring costs.

  • Net profit margin grew by 0.3% QoQ during the quarter. This was mainly driven by lower depreciation expenses during the quarter. For the full year FY11 (year ended March 2011), net profit margin declined by close to 10.0% YoY. This was on account of lower sales growth, decline in other income (largely due to lower exchange gain) and higher tax rate.

What to expect?
At the current price of Rs 390, the stock is trading at a multiple of 7.0 times our estimated FY13 earnings. (ResearchPro subscribers, kindly click here).

Again, the Company missed out on the growth front. The main reason for this lower growth rate was restructuring of smart phone product business into service oriented business. The company’s planned entry and exit into the wireless products business impacted the fourth quarter performance.

The management expects to have better growth rate this year than the growth guidance given by NASSCOM (India's industry body for the tech sector).They expect growth to continue from IT services segment. They added that the growth in Product Engineering Services would come in the second half of the year. The management expects billing rates to remain stable with an upward bias.

On margin front, the management expects that there would be pressure in the short term. But they expect it to improve in the second half of the year. We had recommended the stock in November 2008, and it has already crossed our target price since then.

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