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MindTree: Other income affects net - Views on News from Equitymaster

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MindTree: Other income affects net
Jul 17, 2008

Performance summary
  • Topline grows by 9% QoQ during 1QFY09. Growth aided by strong performance from the IT service segment, which grew by 8.3% QoQ during 1QFY09.

  • Operating margins expand by 2% QoQ during 1QFY09.

  • Adds 20 new clients and 377 employees (gross basis) during 1QFY09; attrition rate at 16.3%



Financial performance: A snapshot…
(Rs m) 4QFY08 1QFY09 Change
Sales 2,039 2,222 9.0%
Expenditure 1,656 1,759 6.2%
Operating profit (EBDIT) 383 463 20.9%
Operating profit margin (%) 18.8% 20.8%  
Other income 81 (457)  
Depreciation 101 103 2.3%
Interest 16 24 53.5%
Profit before tax 348 (121)  
Tax (9) 8  
Profit after tax/(loss) 356 (130)  
Net profit margin (%) 17.5% -5.8%  
No. of shares (m)   38.0  
Diluted earnings per share (Rs)*   18.6  
P/E ratio (x)*   18.0  
* On a trailing 12-month basis

What has driven performance in 1QFY09?
  • MindTree recorded a 9% QoQ growth in topline during 1QFY09, aided by IT service segment which grew by 8.3% QoQ. Growth in IT service segment was mainly driven by independent testing, business intelligence, package implementation, infrastructure management and tech support businesses. The second services segment of the company – R&D – recorded growth of 11.5% QoQ in sales. The management has indicated that they will restructure the segments going forward. They will break down the IT service segment into seven-industry group to focus on different industry groups.

  • MindTree added 20 new clients, and 377 employees (gross) during the first quarter, thereby taking the total employee strength to 5,716 at the end of June 2008. The attrition rate has been 16.3% on trailing twelve-month period as compared to 15.8%b in 4QFY09.

    Segmental Performance
    (Rs m) 4QFY08 1QFY09 Change
    IT Services-Revenues 1,620 1,755 8.3%
    % of total revenues 79.5% 79.0%  
    PBIT margins 21.2% 23.7%  
    R&D Services-Revenues 419 467 11.5%
    % of total revenues 20.5% 21.0%  
    PBIT margins 9.6% 10.6%  
      2,039 2,222 9.0%

  • MindTree’s operating margins expanded by 2% QoQ during 1QFY09 aided by controlled SG&A expense and better utilisation. The management has estimated an expansion in operating margins on the back of volume and price growth coupled with better utilisation.

  • MindTree’s net profit dropped and turned negative during 1QFY09. This drop is mainly because of sudden depreciation of the rupee, resulting in a provision of US$12 m on MindTree’s outstanding derivative instruments. Consequently, the company has reported a net loss of Rs 130 m (US$3.2 m) for the quarter. MindTree expects this provision to reverse during subsequent quarters.

    What to expect?
    At the current price of Rs 345, the stock is trading at a multiple of 10.1 times our estimated FY10 earnings. The management has indicated that the growth is expected on the back of sustenance in volume growth and stable realisations. MindTree has signed a multi-year framework agreement with ArcelorMittal during this quarter to deliver IT Services to ArcelorMittal’s Western European operations. This is a significant deal, which will help company, grow its revenue going forward. MindTree also expects to complete acquisition of Aztecsoft by the end of July for which the process started during the quarter. This acquisition will aid the company’s growth in future. In order to grow its business in Latin America and cater to its existing clients in North America, MindTree will be opening a nearshore development center in Mexico. The company is expecting robust business growth in both IT Services and R&D Services businesses and expects to achieve its revenue and profit guidance for the year.

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