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Mindtree: Margins take a hit
Jul 20, 2010

Mindtree announced 1QFY11 results. Its top line grew by 1.3% QoQ but its net income declined by a whopping 58% due to higher expenses and lower other income.

Performance summary
  • Net sales grow by 1.3% QoQ during 1QFY11.
  • Operating margins fall by 6.2% QoQ during the quarter mainly on account of a 9% QoQ increase in costs of revenues and sales & administrative expenses.
  • Adds 31 new clients during the quarter thus taking the total number of active clients to 261.
  • Trailing 12 months attrition increased sharply to 17.8% during the quarter from 14.1% reported in the previous quarter (4QFY10).


Financial performance: A snapshot...
(Rs m) 4QFY10 1QFY11 Change
Sales 3,444 3,487 1.3%
Expenditure 2,646 3,064 15.8%
Operating profit (EBDIT) 798 423 -47.0%
Operating profit margin (%) 23.2% 12.1%  
Other income 32 21 -33.5%
Depreciation 164 145 -11.4%
Interest 1 -    
Profit before tax 665 299 -55.0%
Tax 120 140 16.7%
Profit after tax/(loss) 545 159 -70.8%
Net profit margin (%) 15.8% 4.6%  
No. of shares (m) 39.5 39.7  
Diluted earnings per share (Rs)*   44.5  
P/E ratio (x)*   12.9  
* On a trailing 12-month basis

What has driven performance in 1QFY11?
  • Mindtree recorded a 1.3% QoQ growth in net sales during the quarter. This was led by a 7% increase in volumes during the quarter but was offset by a decline in billing rates. The management expects billing rates to remain flat during the next quarter but expects the same to increase during the second half of the year.

  • Mindtree’s verticals witnessed a muted growth except for the 'manufacturing' segment, which saw an increase of 10% QoQ during the quarter. The 'travel and transportation' segment declined by 6%QoQ as some of the large projects came to an end during the quarter. The 'R&D' segment declined by 7% QoQ mainly because of a decline in the licensing revenue as well as in the infrastructure system revenue. Going forward, the management expects these two segments to recover in terms of growth.

  • In terms of geographies, Mindtree saw a growth of 2% QoQ and 16% QoQ in its US and India businesses respectively. Business from Europe declined by 1% QoQ and that from the rest of the world declined by 8% QoQ during the quarter.

  • During its conference call, Mindtree's management reiterated its commitment to launch the 3G phone model on schedule. The company is now planning to launch this in the US, India as well as in Europe due to the excellent response seen during its recent road shows.

    Segmental Performance
    Revenue Break-up (In Rs m) 4QFY10 1QFY11 Change
    On basis of segment      
    IT Services-Revenues 1,836 1,886 2.8%
    Product Engineering Services  1,608 1,601 -0.5%
    On basis of industry vertical      
    Manufacturing 430 474 10.2%
    BFSI 603 603 0.1%
    Travel and transportation 492 464 -5.8%
    R & D 496 464 -6.5%
    Software Product Engineering (SPE) 899 941 4.7%
    Other 523 540 3.3%
    On basis of geography      
    US 2,211 2,253 1.9%
    Europe 596 589 -1.1%
    India 241 279 15.7%
    Rest of the world 396 366 -7.6%
    IT Services Revenue Breakup      
    ADM 1,314 1,336 1.6%
    Consulting and IP licensing 46 58 27.4%
    Package implementation 88 77 -12.2%
    Independent Testing 312 321 2.8%
    Infrastructure management and support 75 94 25.3%

  • Mindtree added 31 new clients during the quarter. It added 715 employees (net), thereby taking the total strength to 9,012 at the end of the quarter. However, the attrition rate increased to 17.8% at the end of June 2010.

  • Mindtree’s operating margins declined by 6.2% QoQ during the quarter. This was due to wage hikes, appreciation in the rupee, increase in travel related expenses and expenses related to the new phone development.

What to expect?
At the current price of Rs 539, the stock is trading at a multiple of 9.4 times our estimated FY13 earnings. The management is still optimistic on the current macro-economic scenario, and has indicated that it expects margins to pick up during the balance of the year and at levels comparable to that of last year. This would be aided by better revenue growth and higher utilisation levels. The company has a strong deal pipeline and has already signed two large deals in the travel and transportation segment. 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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