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Mindtree: A strong operating performance - Views on News from Equitymaster

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Mindtree: A strong operating performance
Apr 30, 2014

Mindtree has announced the fourth quarter and full year results for 2013-2014. The company has reported a 4.2% quarter-on-quarter (QoQ) growth in sales and a 10.6% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 4.2% QoQ during 4QFY14. This is on the back of an impressive 4.4% QoQ revenue growth in US dollar terms.
  • The operating profits increased by 14.6% QoQ while operating margins improved by 2% QoQ to 21.5% compared to 19.5% seen during the previous quarter (3QFY14).
  • The company suffered a forex loss of Rs 426 m during the quarter. Thus the other income figure was a negative Rs 298 m.
  • The net profit for the company came in at Rs 982 m, higher by 10.6% QoQ.
  • The company has recommended a total of three dividend payouts. An interim dividend of Rs 5 per share, a special dividend of Rs 5 per share (on the occasion of completion of 15 years of operations) and a final dividend of Rs 5 per share. The board has proposed a bonus share issue in the ratio of 1:1.

Snapshot of Financial Performance
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Sales 7,906 8,237 4.2% 23,618 30,316 28.4%
Expenditure 6,362 6,467 1.7% 19,094 24,216 26.8%
Operating profit (EBDIT) 1,544 1,770 14.6% 4,524 6,100 34.8%
Operating profit margin (%) 19.5% 21.5%   19.2% 20.1%  
Other income (Including forex gain/loss) (189) (298)   350 496 41.7%
Depreciation 208 223 7.2% 624 809 29.6%
Interest 1 -   10 4 -60.0%
Profit before tax 1146 1249 9.0% 4,240 5,783 36.4%
Tax 258 267 3.5% 847 1,275 50.5%
Profit after tax/(loss) 888 982 10.6% 3,393 4,508 32.9%
Net profit margin (%) 11.2% 11.9%   14.4% 14.9%  
No. of shares (m)         41.7  
Diluted earnings per share (Rs)*         108.1  
P/E ratio (x)*         13.2  
* On a trailing 12-month basis

What has driven performance in 4QFY14?
  • In terms of industry verticals, product engineering registered good growth in the quarter of 5.7% QoQ while manufacturing and retail recorded the best performance of 7.15% QoQ.

  • In terms of geographies, the US was the main driver of revenues with 6.4% QoQ growth while revenue from India was down sharply by 18% QoQ.

  • In terms of service lines, the fastest growth was seen in Consulting, package implementation and IP led revenue although on a small base. Infrastructure management and testing were the only large service lines to record good growth in the quarter.

    Segmental summary
    Revenue Break-up (In Rs m) 3QFY14 4QFY14 Change
    On basis of industry vertical
    ITS-Manufacturing & Retail 1,700 1,820 7.1%
    ITS-BFSI 1,842 1,919 4.2%
    ITS-Travel, Media & Services 1,629 1,623 -0.4%
    ITS-Other 593 618 4.2%
    Product Engineering Services (PES) 2,135 2,257 5.7%
    On basis of geography
    US 4,554 4,843 6.4%
    Europe 2,237 2,306 3.1%
    India 372 305 -18.0%
    Rest of the world 735 774 5.3%
    On the basis of service offerings
    Development 2,000 1,919 -4.0%
    Engineering 799 807 1.1%
    Maintenance 1,874 1,862 -0.6%
    Consulting 261 313 20.0%
    Package Implementation 190 338 78.0%
    IP Led Revenue 55 91 63.7%
    Independent Testing 1,312 1,376 4.8%
    Infrastructure Management & Tech Support 1,407 1,532 8.9%

  • In terms of operational performance, the margin improvement was as a result of a 5.3% sequential reduction in selling, general and administrative (SG&A) expenses on an absolute basis.

  • At the net level, the net margin improved to 11.9% compared to 11.2% seen in 3QFY14. The forex loss certainly hampered the bottomline performance. Without the forex loss the pre-tax profit would has grown by 46.2% QoQ.
What to expect?
At the current price of Rs 1,432, the stock is trading at a multiple of 13.2 times of its trailing twelve months earnings.

Mindtree has had a wonderful year in FY14. The company has recorded a growth of 15.1% in US dollar terms. With this growth the company has crossed the half billion dollar mark in terms of revenue. Even at the operating level Mindtree has crossed the US$ 100 m mark along with an improvement in margins.

The last quarter of the financial year was a good one as the company recorded a topline growth of 4.4% QoQ in US dollar terms. The high end product engineering services segment delivered a stunning performance recording a growth of 6.1% QoQ in dollar terms. However, it must be kept in mind that revenues from this segment are by nature very lumpy and therefore this high growth cannot be sustained on a quarterly basis.

Mindtree added 15 new clients in the quarter. The total number of active clients stands at 207 at the end of FY14. The company has increased the number of multi-million dollar clients by 7 on a sequential basis demonstrating good performance with regards to client mining. Revenues from repeat business stand at 99.1%.

The company is going for a bonus share issue in the ratio of 1:1. In case the management gets shareholder approval for the issue before the annual general meeting then the special and final dividends of Rs 5 each would be accordingly lowered to Rs 2.5 per share.

The management stated that both the deal pipeline as well as the win rates for the company has improved YoY. Thus they sounded confident of beating the NASSCOM guidance of 13-15% revenue growth in US dollar terms.

We are very satisfied with the performance of Mindtree in FY14 and the coming year certainly looks promising. However, at the current price we believe that all the positives for the company are already factored in. We had recommended the stock in September 2013, when we suggested that investors should buy the stock at Rs 875 or lower. We maintain the same view for now but we will soon update investors with the revised estimates from an FY17 perspective.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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