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Mindtree: Yet another good quarter - Views on News from Equitymaster

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Mindtree: Yet another good quarter
Jul 30, 2014

Mindtree has announced results for the first quarter 2014-2015 (1QFY15). The company has reported a 2.4% quarter-on-quarter (QoQ) growth in sales and a 31.8% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 2.4% QoQ during 4QFY14. This is on the back of an exceptional 6.4% QoQ revenue growth in US dollar terms.
  • The operating profits however decreased by 4.8% QoQ while operating margins fell by 1.5% QoQ to 20% compared to 21.5% seen during the previous quarter (4QFY14). This was due a sharp rise in selling, general and administrative (SG&A) expenses.
  • The company had a forex gain of Rs 137 m during the quarter. This led to a healthy other income figure of Rs 210 m.
  • The bottomline was boosted by this forex gain. The net profit came in at Rs 1,294 m, higher by 31.8% QoQ.

Financial performance snapshot
(Rs m) 4QFY14 1QFY15 Change
Sales 8,237 8,435 2.4%
Expenditure 6,467 6,750 4.4%
Operating profit (EBITDA) 1,770 1,685 -4.8%
Operating profit margin (%) 21.5% 20.0%  
Other income (Including forex gain/loss)  (298) 210  
Depreciation 223 228 2.2%
Interest -  -  
Profit before tax 1,249 1,667 33.5%
Tax 267 373 39.7%
Profit after tax/(loss) 982 1,294 31.8%
Net profit margin (%) 11.9% 15.3%  
No. of shares (m)   83.6  
Diluted earnings per share (Rs)*   53.2  
P/E ratio (x)*   19.5  
*On a trailing 12-month basis

What has driven performance in 1QFY15?
  • In terms of industry verticals, growth was driven by Travel, Hospitality and Media industries. However, Manufacturing and Retail delivered a muted performance.

  • In terms of geographies, the US was the main driver of revenues yet again with 3.1% QoQ growth while revenues from India and Europe were down by 3.1% QoQ and 2.0% QoQ.

  • In terms of service lines, the fastest growth was seen in the non-linear services like IP and Package Implementation as well as in application development. Application maintenance and testing were the laggards in the quarter.

    Segmental Performance
    Revenue Break-up (In Rs m) 4QFY14 1QFY15 Change
    On basis of industry vertical
    Manufacturing, CPG & Retail 1,820 1,788 -1.8%
    BFSI 1,919 1,915 -0.2%
    Travel & Hospitality 1,268 1,383 9.1%
    Hi-Tech & Media Services  2,619 2,758 5.3%
    Other 618 599 -3.1%
    On basis of geography
    US 4,843 4,994 3.1%
    Europe 2,306 2,261 -2.0%
    India 305 295 -3.1%
    Rest of the world 774 886 14.4%
    On the basis of service offerings
    Development 1,919 2,041 6.4%
    Engineering 807 818 1.4%
    Maintenance 1,862 1,738 -6.7%
    Consulting 313 321 2.4%
    Package Implementation 338 455 34.9%
    IP Led Revenue   91 143 58.3%
    Independent Testing 1,376 1,324 -3.7%
    Infrastructure Management & Tech Support 1,532 1,594 4.1%

  • In terms of operational performance, the margin was impacted by continuing sales and marketing efforts. The selling, general and administrative (SG&A) expenses were up 17.5% QoQ. This was largely a as a result of higher visa cost that is typical in Q1 for Indian IT companies. Despite this jump the company’s operating margin remains quite healthy.

  • The sequential bottom line performance received a big boost due to the Rs 137 m forex gain in the quarter. This compares favourably to the forex loss of Rs 426 m in 4QFY14. Thus the net profit increased by 31.8% QoQ. The net margin improved to 15.3% compared to 11.9% in 4QFY14.
What to expect?
At the current price of Rs 1,040, the stock is trading at a multiple of 19.5 times of its trailing twelve months earnings.

Mindtree delivered an outstanding performance in 1QFY15. This is the second quarter in a row that the company has delivered the best topline growth in the industry. The management has stated that this can be sustained for the rest of the year but not at the growth rates of the last two quarters.

The growth in the quarter was driven by non-linear services like IP and product engineering. This helped offset the seasonal visa costs and wage hikes given in the quarter. The management sounded confident of improving operating margins from current levels.

The company is witnessing good traction in new digital technologies like SMAC and is well positioned to take advantage of the same. These technologies have better margins than traditional services but the contract sizes are smaller.

The company had declared a 1:1 bonus issue in the quarter gone by. After making the adjustment for the bonus and keeping in mind the valuations, we recommend that investors do not buy the stock.

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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