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Mindtree: Forex gains aid profits - Views on News from Equitymaster
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Mindtree: Forex gains aid profits
Apr 29, 2010

Performance summary
  • Net sales grow by 5% YoY during FY10, by 4% QoQ during 4QFY10 particularly aided by its IT services business.
  • Operating margins decline by 7.8% YoY during FY10. This is mainly on account of a 17% increase in costs of revenues and sales and administrative overheads. Rupee appreciation also impacts margins.
  • Net profit grows nearly four-fold in FY10 (up by 311% YoY). This is on the back of forex gains as against forex losses in FY09. During 4QFY10, net profits grows by 1% QoQ.
  • Adds 27 new clients during 4QFY10 thus taking the total number of active clients to 258 at the end of March 2010. Adds 170 employees during 4QFY10 thus taking the total strength to 8,300 at the end of March. Attrition rate stands at 14.1%.
  • Recommends a final dividend of Rs 2 per share, including a special dividend of Re 1 per share on the occasion of company's 10th anniversary.

Financial performance: A snapshot...
(Rs m) 3QFY10 4QFY10 Change FY09 FY10 Change
Net sales          3,319          3,444 3.8%       12,375     12,960 4.7%
Expenditure          2,661          2,811 5.6%         9,065    10,504 15.9%
Operating profit (EBDIT)             657              632 -3.8%         3,310       2,456 -25.8%
Operating profit margin (%) 19.8% 18.4%   26.7% 18.9%  
Other income                28                32 12.9%              115              96 -16.5%
Depreciation              168              164 -2.5%             570           652 14.4%
Interest                   1                   1 100.0%              162              27 -83.5%
Profit before tax             517              499 -3.4%         2,693       1,873 -30.4%
Tax              153              120 -21.5%                67           398 492.6%
Forex gains/losses             174              165 -4.8%       (2,089)           673  
Profit after tax/(loss)             538              545 1.3%             537        2,149 300.3%
Share of profit from associates -   -                    27 -    
Minority Interest -   -                    41 -    
Net profit             538              545 1.3%             523        2,149 310.7%
Net profit margin (%) 16.2% 15.8%   4.2% 16.6%  
No. of shares (m)                  38.0          39.5  
Diluted earnings per share (Rs)                  54.4  
P/E ratio (x)                  10.5  
* On a trailing 12-month basis

What has driven the performance during FY10?
    Mindtree recorded a 4% QoQ growth in sales during 4QFY10. This was driven by the robust performance from its IT services business (53% of consolidated sales) which grew by 8% QoQ. However, the product engineering services business (includes R&D service and software product engineering) displayed a muted performance. Nevertheless, the company witnessed traction in its IT services across geographies and industry verticals. Banking & financial services, and travel & transportation witnessed significant growth.
    Segmental Performance
    Revenue Break-up (In Rs m) 3QFY10 4QFY10 Change
    On basis of segment       
    IT Services          1,696          1,836 8.2%
    Product Engineering Services           1,623          1,608 -0.9%
    On basis of industry vertical      
    Manufacturing             402             430 7.2%
    BFSI              531             603 13.5%
    Travel and transportation              418              492 17.8%
    R & D             478              496 3.8%
    Software Product Engineering (SPE)             923              899 -2.6%
    Other             567              523 -7.8%
    On basis of geography      
    US         2,137          2,163 1.2%
    Europe              611              644 5.5%
    India              212              217 2.2%
    Rest of the world             358             420 17.2%

    IT Services Revenue Breakup      
    ADM          1,231          1,314 6.8%
    Consulting and IP licensing                42                46 8.2%
    Package implementation                71                88 23.7%
    Independent Testing             288              312 8.2%
    Infrastructure management and support                63                75 19.9%
    Source: Company

  • Mindtree added 27 new clients during 4QFY10. It added 170 employees (net), thereby taking the total strength to 8,300 at the end of March. The attrition rate has risen to 14.2%, from 10.7% in FY09.

  • Mindtree's operating margins declined by 7.8% YoY during FY10 mainly on account of muted topline growth and significant increase in expenses. Rupee appreciation during the year also dented the margins. Margins declined by 1% QoQ during 4QFY10.

  • Mindtree's net profit increased by 310% YoY during FY10. This increase can mainly be attributed to high forex gains reversing the losses incurred last year. However excluding these losses, the bottomline fell by 43% YoY during the fiscal due to higher costs. The company has earmarked a capital expenditure of US$ 23 m in FY11, and expects to add 2,500 employees during the year.

What to expect?
At the current price of Rs 572, the stock is trading at a multiple of 7.5 times our estimated FY12 earnings. During the analyst conference call, the management sounded optimistic on the current macro-economic scenario, and indicated a pick up in the demand for IT services. It was particularly upbeat about the uptick in the BFS and travel and transport verticals. Though the management has discontinued giving guidance on future growth, it hinted that it expects the services segments to grow at a rate higher than that expected by NASSCOM in 2011 (i.e., 13-15%).

Mindtree has a strong deal pipeline across its service offering like R&D services, software engineering and infrastructure management services. In order to grow its infrastructure services segment, it is planning to acquire 7Strata, a Chennai-based remote infrastructure management services provider having significant IPs (intellectual properties, or patents) in this line. It appears that Mindtree has begun to benefit from its acquisition of Kyocera Wireless India. The new business line (Next in Wireless or NIW) so started is included in company's consolidated financial results. Mindtree plans to launch a new Android based 3G smart-phone under this business line in 3QFY11. Though the actual acceptance will decide the success of this product, initial feedback appears to be encouraging. It plans to make an investment of US$ 10-11 m over the next two quarters. In order to curb attrition, the management plans to offer a wage hike of 13-15% at offshore and 2-4% at onsite. This along with expected increase in sales and marketing efforts, will impact Mindtree's margins in the short term. 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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