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Mindtree: Maintains the growth momentum - Views on News from Equitymaster
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Mindtree: Maintains the growth momentum
Jul 31, 2015

Mindtree has announced results for the first quarter of FY16. The company has reported a 6.9% QoQ growth in sales and a 7.4% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 6.9% QoQ during 1QFY16. This was on the back of a 4.8% QoQ growth in US dollar terms and a 5.2% QoQ growth in constant currency terms.
  • The operating profits decreased by 3.2% QoQ and operating margins fell to 17.6% compared to 19.5% seen in 4QFY15. This was largely due a steep 19.5% QoQ rise in SG&A expenses in 1QFY16. This was as a result of seasonally higher visa costs. Keeping in mind the strong deal pipeline, the company has applied for a greater number of visas compared to the recent past.
  • The company had a forex gain of Rs 202 m during the quarter. This led to the other income more than doubling on a sequential basis.
  • Largely due to the forex gain, the net profit increased by 7.4% QoQ.
  • The company has declared an interim dividend of Rs 3 per share.
  • Mindtree has announced two acquisitions: US based Relational Solutions Inc, an analytics firm focusing on the retail and consumer sectors and U.K. based Bluefin Solutions, a consulting firm specialising in SAP.

Financial performance snapshot
(Rs m) 4QFY15 1QFY16 Change
Sales 9,181 9,816 6.9%
Expenditure 7,395 8,087 9.4%
Operating profit (EBITDA) 1,786 1,729 -3.2%
Operating profit margin (%) 19.5% 17.6%  
Other income (Including forex gain/loss) 174 374 114.9%
Depreciation 295 322 9.2%
Interest - -  
Profit before tax 1,665 1,781 7.0%
Tax 378 399 5.6%
Profit after tax/(loss) 1,287 1,382 7.4%
Net profit margin (%) 14.0% 14.1%  
No. of shares (m)   83.8  
Diluted earnings per share (Rs)*   65.1  
P/E ratio (x)*   19.2  
*On a trailing 12-month basis

What has driven performance in 1QFY16?
  • In terms of the operating metrics, the company witnessed good growth in the US geography, the BFSI & manufacturing verticals, as well as the traditional ADM & IMS services. However, the rest of the metrics were muted.

    Segmental performance
    Revenue Break-up (Rs m) 4QFY15 1QFY16 Change
    On basis of industry vertical
    Manufacturing, CPG & Retail 1,992 2,160 8.4%
    BFSI 2,295 2,591 12.9%
    Travel & Hospitality 1,469 1,521 3.6%
    Hi-Tech & Media Services  2,993 3,112 4.0%
    Other 432 432 0.1%
    On basis of geography
    US 5,958 6,626 11.2%
    Europe 2,176 2,150 -1.2%
    India 331 334 1.0%
    Rest of the world 716 707 -1.3%
    On the basis of service offerings
    Development 2,130 2,395 12.4%
    Engineering 918 883 -3.8%
    Maintenance 1,910 2,130 11.5%
    Consulting 358 363 1.4%
    Package Implementation 689 707 2.6%
    IP Led Revenue 156 137 -12.0%
    Independent Testing 1,414 1,463 3.4%
    Infrastructure Management & Tech Support 1,607 1,737 8.1%

  • At the operating level, high visa costs to the tune of US$ 3.3 m hurt the margins. The same was US$ 2.4 m in 1QFY15. Going forward, the company expects the impact of wage hikes in 2QFY16 as well as investments in digital technologies will prevent margin expansion in the short term. The company has given salary increases of 9% offshore and 3% onsite.

  • At the net level, the weak operating performance was compensated somewhat by the forex gain. The bottomline increased 7.4% QoQ.
What to expect?
At the current price of Rs 1,252, the stock is trading at a multiple of 19.2 times of its trailing twelve months earnings.

Mindtree has made a good start to FY16. Revenues crossed the milestone of US$ 150 m in the quarter. Volumes increased 6.4% QoQ while realisation fell 1.5% QoQ due to greater number of working days on a sequential basis.

The growth momentum remains strong. The company signed orders signed worth US$ 208 m (US$ 38 m new deals and US$ 170 m in renewals) during the quarter. Out of this, US$ 159 m is to be completed over the next 12 months. 1QFY16 witnessed the strongest deal win performance over last 5 quarters.

Digital revenues grew 12.7% QoQ. Digital now contributes 34.7% of sales. The digital deal pipeline is a little over US$ 100 m and deal sizes have increased 15% QoQ as per the management.

Mindtree added its 2nd US$ 50 m client in the quarter. The company added 16 new clients in 1QFY16, six of them in digital. The management maintains that the company will beat NASSCOM's FY16 industry growth guidance of 12-14%.

On the flip side, attrition continues to be high at 18.4% on a LTM basis, increasing marginally in the quarter. However, it must be kept in mind that the April-June quarter typically witnesses the highest attrition rate for the year in the Indian IT sector.

We are currently updating our financial estimates for the company. However, at these levels, the valuations of the stock continue to remain stretched. Thus, we maintain our view that investors should wait for better valuations before entering the stock.

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