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Mindtree: Forex gains boost profits
Aug 14, 2013

Mindtree Limited has announced the first quarter results of financial year 2013-2014 (1QFY14). The company has reported a 5.8% quarter-on-quarter (QoQ) growth in sales and 71.6% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 5.8% QoQ during 1QFY14. This represents a decent 4.1% QoQ growth in US Dollar terms.
  • Operating margins dipped marginally by 0.6% QoQ to 18.4% as compared to 19% seen during the previous quarter (4QFY13). This was due to higher operating costs during the quarter.
  • The margin contraction was compensated by the positive effect of rupee depreciation. The average exchange rate for the quarter was Rs 55.05 per US dollar compared to a rate of Rs 54.18 in the previous quarter.
  • The company reported a forex gain of Rs 618 m for the quarter, resulting in a big jump in other income which grew to Rs 735 m. This compared to just Rs 1 m the last quarter (4QFY13). The forex gain helped the profit before tax (PBT) rise by 73% QoQ.
  • Net profits grew by 71.6% QoQ largely due to an increase of 78% QoQ for taxation.
  • Added 9 new clients during the quarter. Total number of active clients stood at 222 as compared to 232 at the end of the previous quarter (4QFY13).
  • Encouragingly, attrition among employees has been declining steadily. The trailing 12 month attrition declined to 12.4% during the quarter from 13.4% reported in the previous quarter (4QFY13). The attrition rate at the end of FY12 was 18.2%.

Financial performance: A snapshot...
(Rs m) 4QFY13 1QFY14 Change
Sales 6,124 6,477 5.8%
Expenditure 4,961 5,286 5.8%
Operating profit (EBDIT) 1,163 1,191 2.4%
Operating profit margin (%) 19.0% 18.4%  
Other income (Including forex gain/loss) 1 735  
Depreciation 155 181 16.8%
Interest 1 1 0.0%
Profit before tax 1,008 1,744 73.0%
Tax 219 390 78.1%
Profit after tax/(loss) 789 1,354 71.6%
Net profit margin (%) 12.9% 20.9%  
No. of shares (m) 41.5 41.56  
Diluted earnings per share (Rs)*   92.8  
P/E ratio (x)*   10.7  
* On a trailing 12-month basis

What has driven performance in 1QFY14?
  • Mindtree recorded a 5.8% QoQ growth in net sales during the quarter. The growth was driven by a 4.1% QoQ growth in Dollar revenues and a marginal Dollar appreciation against the Rupee.

  • In terms of business segments, IT Services registered a good growth of 7.1% QoQ. The Product Engineering Services (PES) business did not perform well during the quarter and registered a muted growth of 2.6% QoQ. The management had indicated that the PES segment would pick up in FY 14 but an improvement was not seen in this quarter.

  • In terms of industry verticals, all the major segments witnessed a growth during the quarter. The two biggest verticals, 'Banking, Financial Services and Insurance (BFSI)' and 'Manufacturing & Retail' reported a sequential growth of 10.6% QoQ and 11.1% QoQ. However, revenues from 'Travel, Media & Services' witnessed a muted growth of 4.7% QoQ. The 'Others' segment recorded a contraction of 5.3% QoQ.

  • In terms of geographies, Mindtree saw a strong growth of 10.5% QoQ coming in from the US, which contributes more than half (57.8%) of the revenues. Revenues from the European market (27.4% of net sales) remained under pressure. Growth from this region fell 1.1% QoQ. Revenues from the Indian market as well as the 'Rest of the World' markets increased by 0.6% QoQ and 2.4% QoQ respectively.

  • In terms of service lines, the major segments 'Development' (26.5% of net sales) and 'Maintenance' (22.5% of net sales) grew by 11.2% Q0Q and 9.7% QoQ respectively. 'Infrastructure Management and Tech Support' and 'Independent Testing' also witnessed a good growth of 9.6% QoQ and 8.2% QoQ respectively. The 'Consulting' business witnessed a growth of just 2.1% QoQ. The other segments, namely 'Package implementation', 'IP Led Revenue', and 'Engineering', all witnessed a slow down during the quarter by 26.4% QoQ, 6.7% QoQ and 4.4% QoQ respectively.

    Segmental Performance
    (In Rs m) 4QFY13 1QFY14 Change
    On basis of segment      
    IT Services-Revenues 4,299 4,605 7.1%
    Product Engineering Services 1,825 1,872 2.6%
    On basis of industry vertical      
    ITS-Manufacturing & Retail 1,219 1,354 11.1%
    ITS-BFSI 1,335 1,477 10.6%
    ITS-Travel, Media & Services 1,219 1,276 4.7%
    ITS-Other 527 499 -5.3%
    Product Engineering Services (PES) 1,825 1,872 2.6%
    On basis of geography      
    US 3,387 3,744 10.5%
    Europe 1,794 1,775 -1.1%
    India 374 376 0.6%
    Rest of the world 570 583 2.4%

      4QFY13 1QFY14 Change
    Development 1,543 1,716 11.2%
    Engineering 766 732 -4.4%
    Maintenance 1,329 1,457 9.7%
    Consulting 178 181 2.1%
    Package Implementation 282 207 -26.4%
    IP Led Revenue 104 97 -6.7%
    Independent Testing 1,078 1,166 8.2%
    Infrastructure Management & Tech Support 845 926 9.6%

  • The company added 9 new clients during the quarter. The total number of active clients has stood at 222 at the end of the quarter. The management has stated that it plans to focus on selective clients to improve margins. This should help boost the company's margins in the future.

  • On a net basis, total employee strength went up by 648, thereby taking the total strength to 12,239. The management has certainly been successful in reducing attrition over the last few quarters. The attrition rate came down to 12.4% at the end of June 2013 as compared to 13.4% reported in the previous quarter (4QFY13).

  • Mindtree's operating margins fell by 0.6% QoQ to 18.4% as compared to 19% in 4QFY13 due to higher operating costs (as a percentage of sales) during the quarter. This was expected by the management; due to a combination higher number of visas filled in 1QFY 14 and the addition of new campus batches added in the quarter.

  • The net employee utilization (excluding trainees) improved significantly to 74% compared to 70.9% seen during 4QFY13. However the gross employee utilization (including trainees), remained the same at 69.6%.

  • A slower growth of 2.4% QoQ at the operating level was compensated by a big forex gain of Rs 618 m, which translated into a good growth at the net level. Net profit grew by 71.6% QoQ.

  • The company has outlined routine operating capital expenditure of about US$ 20 m during the year and an extra capex of US$ 20 m to set up a facility in Bubhneshwar.
What to expect?
At the current price of Rs 993, the stock is trading at a multiple of 10.7 times of its trailing twelve months earnings.

The management has indicated that margins are expected to remain stable going forward as the visa issue that the company faced during the quarter, is behind them. They also expect revenue growth to continue going forward, driven largely by growth in volumes and helped by a small increase in both, pricing and utilization. The guidance for the growth in topline has been maintained at 12-14% in US dollar terms (for FY14). The company does not expect any problems in the IT budget spends of its clients, especially in the US. However, growth from the European geography is expected to be very client specific.

We had recommended the stock in November 2008, and it has already crossed our target price since then. We will update investors about our FY16 estimates for the stock and revised view by end of August 2013.

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