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Mindtree: Facing tough times - Views on News from Equitymaster
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Mindtree: Facing tough times
Jul 21, 2009

Performance summary
  • Topline declines by 10% QoQ during 1QFY10. This can be attributed to decrease in volumes on account of muted IT spending from existing clients, particularly in the manufacturing and R & D segments. However, some traction seen in travel and tourism segment.
  • Operating margins contract by 9% QoQ during 1QFY10, on account of lower employee utilization and cost over-runs on some fixed price projects.
  • Bottomline declines by 17% QoQ on account of lower revenues and higher software development costs. Profits have eroded despite a major reversal in mark-to-market forex losses which contributed immensely to the other income component.
  • Adds 18 new clients and 92 employees (gross basis) during 1QFY10; attrition rate at 11.4%.

Financial performance: A snapshot…
(Rs m) 4QFY09 1QFY10 Change
Sales 3,381 3,048 -9.8%
Expenditure 2,516 2,541 1.0%
Operating profit (EBDIT) 865 507 -41.4%
Operating profit margin (%) 25.6% 16.6% -9.0%
Other income 13 332  
Depreciation 159 161 1.1%
Interest 42 24 -42.4%
Profit before tax 678 654 -3.5%
Tax (27) 87  
Profit after tax/(loss) 705 567 -19.5%
Minority Interest 23 -  
Net profit 682 567 -16.8%
Net profit margin (%) 20.2% 18.6%  
No. of shares (m) 37.7 39.7  
Diluted earnings per share (Rs)*   10.3  
P/E ratio (x)*   48.0  
* On a trailing 12-month basis

What has driven performance in 1QFY09?
  • Mindtree recorded a 10% QoQ decline in topline during 1QFY10. This was mainly due to lower volumes on account of restricted IT spending by key clients in the manufacturing, R & D and software engineering segments. The pricing pressures also took a toll as billing rates declined by 0.5% QoQ. Based on industry verticals, the company found some solace in travel and transportation, where revenues grew by 22% YoY during the quarter. As for its BFSI and manufacturing verticals, sales declined by 6% QoQ and 14% QoQ respectively. The US continued to remain Mindtree’s largest market contributing 67% to the revenues. There was 4% growth in revenues from the European market and the same contributed about 20% to this quarter’s total revenue.

      4QFY09 1QFY10  
    Industry vertical wise revenue breakup % of Total Rs m % of Total Rs m Change
    Manufacturing 13.5% 456 12.9% 393 -13.9%
    BFSI 17.0% 575 17.8% 542 -5.6%
    Travel and transportation 11.2% 379 15.1% 460 21.5%
    R & D 17.7% 598 14.1% 430 -28.2%
    Software Product Engineering (SPE) 29.6% 1,001 29.3% 893 -10.8%
    Other 11.0% 372 10.8% 329 -11.5%

  • Mindtree added 18 new clients and 92 employees (gross) during the first quarter, thereby taking the total employee strength to 7,693. The attrition rate at the end of the quarter stood at 11.4%, as compared to 13.7% in 4QFY09.

  • Mindtree’s operating margins declined by 9% QoQ during the quarter, largely marred by a poorer utilisation rate (including trainees) which decreased to 61.1% from 65.3% in the 4QFY09. The company saw no significant change in the onsite-offshore effort mix, which also eroded the margin in a less favorable pricing environment. Margins were also impacted by cost-overruns on fixed priced projects.

  • Mindtree’s net profit dropped by 17% during 1QFY09, and was a result of weakness in sales and operating margins as explained above.

What to expect?
At the current price of Rs 494, the stock is trading at a multiple of 15.4 times our estimated FY12 earnings. Mindtree’s management believes that the operating environment continue to remain challenging with sustained uncertainty in terms of IT spending, pricing pressure and forex movements. It has revised its revenue guidance for the current fiscal from the range Rs 14,906 m to Rs 15,420 m, to the range of Rs 12,342 m to Rs 13,068 m. Further, it expects net profits of Rs 1,471 m to Rs 1,781 m with an annual EPS of around Rs 37.4 to Rs 45.3. However, the management remains confident of the future prospects and continued business momentum on back of strong deal pipeline. It 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.

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 overpriced.

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