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Mindtree: FY09 Annual Report extracts - Views on News from Equitymaster
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Mindtree: FY09 Annual Report extracts
Aug 21, 2009

Mindtree Ltd. is one of the fastest growing mid-sized IT companies in India. The company did reasonably well during FY09 as well, a year that plagued even the behemoths of the corporate world and even destroyed a few. During the fiscal, the company registered a topline growth of around 67% YoY. Further, operating margins expanded to 26.7% during the year, from 16.9% in FY08. Nevertheless, the successful acquisition and integration of Aztecsoft aided much of these gains, thereby making FY09 performance a little less comparable to FY08. Anyways, Mindtree’s bottomline for FY09 declined drastically by 49% mainly due to forex losses due to mark-to-market provisions on their dollar hedges. Nonetheless, the company believes these non-cash losses are temporary and will reverse themselves, resulting in better financial performance in FY10.

As indicated in the annual report, the company saw a significant shift in its project mix with contribution from fixed price projects declining from 21.1% of sales during FY08 to 13.1% of sales during FY09. This shift can be attributed the uncertainty that Mindtree’s clients faced in regards of their IT budgets. It is worth noting that Mindtree’s business model previously focused more on consultancy and IP Licensing and package implementation projects (all high end work), and less on lower-end annuity based services like maintenance and infrastructure management projects. But taking a hit from the slowdown in global tech spending, the company is now changing its revenue mix whereby it is aiming to generate about 45% of its revenues from long-term deals in the application maintenance and testing spaces.

Presently the company generates only 24% of its revenues from annuity-based projects, while its larger competitors like Infosys and Wipro generate as high as 80% of their revenues from long-term projects, giving them far more predictability and stability even in a downturn.

Deterioration in demand, uncertainty about the IT spending, pricing pressure and intense competition continues to plague Mindtree in FY10 as well. The company opened the fiscal year on a muted note, with sales falling 10% and net profits falling 17% on a QoQ basis during 1QFY10. Nevertheless, its experienced management team remains confident of its future growth prospects on account of long-term client relationships, comprehensive range of services and most importantly knowledge management and innovation.

At the current price of Rs 488, the stock is trading at a multiple of 6.3 times our estimated FY12 earnings. We had recommended the stock in November 2008, and it has already crossed our target price since then. At the current valuations, we remain cautious on the stock.

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