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Mindtree: Acquisition led growth - Views on News from Equitymaster

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Mindtree: Acquisition led growth
Apr 28, 2009

Performance summary
  • Topline (including Aztecsoft) grows by 67% YoY during FY09, declines 7%QoQ during the fourth quarter.
  • Operating margins expand by 9.8% YoY during FY09 mainly on account of acquisition of Aztecsoft. Cost containment and rupee depreciation have also aided margins.
  • Adds 22 new clients thus taking the total number of active clients to 261 at the end March 2009.
  • Attrition comes down to 11.8% during 4QFY09 from 13.8% in the previous quarter.
  • On a consolidated basis, revenue guidance stands at of Rs14, 906 m to Rs15, 420 m for FY10 and net profit at Rs 1,938 m to Rs 2,005 m. EPS is expected to be in the range of Rs 49.3 – 50.9


Financial performance: A snapshot…
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 3,638 3,381 -7.1% 7,398 12,375 67.3%
Expenditure 2,529 2,516 -0.5% 6,144 9,065 47.5%
Operating profit (EBDIT) 1,109 865 -22.0% 1,254 3,310 163.9%
Operating profit margin (%) 30.5% 25.6%   16.9% 26.7%  
Other income 32 13 -58.4% 238 115 -51.5%
Depreciation 161 159 -0.9% 356 570 60.0%
Interest 52 42 -19.4% 59 162 174.6%
Profit before tax 929 678 -27.1% 1,077 2,693 150.1%
Tax 37 (27) -173.0% 85 67 -21.3%
Forex gain/(loss) (789) (493)   42 (2,089)  
Profit after tax/(loss) 103 211 105.2% 1,033 537 -48.0%
Share of profit to associates - -   - 27  
Minority interest 16 23   - 41  
Net profit 87 188 115.6% 1,033 523 -49.4%
Net profit margin (%) 2.4% 5.6%   14.0% 4.2%  
No. of shares (m)       37.9 38.0  
Diluted earnings per share (Rs)*         13.8  
P/E ratio (x)         18.2  

What has driven performance in FY09?
  • Mindtree recorded a 67% YoY growth in topline during FY09, mainly aided by integration of Aztecsoft. During 4QFY09, growth in R&D Services got some sanity to the topline performance. The growth in the R&D Services vertical was led by ‘storage and service’ offering and ‘consumer appliance’ offering. These offerings account for almost 70% of Mindtree’s R&D Services revenues. The management indicated in its conference call that this segment is expected to grow significantly going forward.

    Segmental Performance
    (Rs m) 3QFY09 4QFY09 Change
    IT Services-Revenues 2,176 1,972 -9.4%
    % of total revenues 59.8% 58.3%  
    PBIT margins 33.0% 22.9%  
    R&D Services-Revenues 586 594 1.3%
    % of total revenues 16.1% 17.6%  
    PBIT margins 21.6% 29.8%  
    Aztecsoft Business revenues 875.5 815.2 -6.9%
    % of total revenues 24.1% 24.1%  
    PBIT margins 11.6% 2.7%  
    Total Revenue 3,638 3,381  

  • Mindtree added 22 new clients during 4QFY09. It added 217 employees (net), thereby taking the total strength to 7,866 at the end of the quarter. The attrition rate has come down to 11.8% at the end of March 2009 from 13.8% in the previous quarter.

  • Mindtree’s operating margins expanded by 7% YoY during FY09 mainly on account of robust topline growth. Furthermore, favorable rupee movement coupled with better utilisation and cost containment also aided the margin improvement.

  • Mindtree’s net profit declined by 49% YoY during FY09. This decline can mainly be attributed to high forex losses. Excluding these losses, the bottomline has grown by 163% YoY during the fiscal.

What to expect?
At the current price of Rs 250, the stock is trading at a multiple of 6.9 times our estimated FY11 earnings. The management has sounded caution on the current macro-economic scenario, though it has indicated of not witnessing any significant pricing pressure. The management has indicated in its conference call that it expects recovery in the later half of FY10, and has given a revenue guidance of Rs 14,906 m to Rs 15, 420 m for FY10 and net profit guidance at Rs 1,938 m to Rs 2,005 m. EPS is expected to be in the range of Rs 49.3 – 50.9 during FY10. The company has given this guidance mainly on account of good revenue visibility due to its strong order book. Furthermore, integration of Aztecsoft will also aid the growth during FY10. We remain positive on the company from 2 to 3 years perspective, though will have to revise our profit estimate downwards given the high forex losses recorded during FY09.

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