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Mindtree: Acquisition aids growth - Views on News from Equitymaster
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Mindtree: Acquisition aids growth
Oct 21, 2008

Performance summary
  • Topline grows by 40% QoQ during 2QFY09. Growth not really comparable due to the acquisition of Aztecsoft during the quarter. In terms of the organic business, sales from the IT services segment grew by 15% QoQ during the quarter.
  • Operating margins expand by 7% QoQ during 2QFY09 mainly on account of rupee’s depreciation against dollar and higher utilisation.
  • Adds 22 new clients and 321 employees (gross) during 2QFY09; attrition rate stands at 15%.
  • During the quarter, the company increased equity stake in Aztecsoft Ltd. to 79.9%. As such, revenues of US$ 12.5 m and a profit of US$ 0.25 m have been consolidated into the accounts of 2QFY09.
  • Recommends interim dividend of Re 1 per share (dividend yield 0.4%).

Financial performance: A snapshot…
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 2,236 3,120 39.6% 3,435 5,356 55.9%
Expenditure 1,767 2,254 27.5% 2,880 4,021 39.6%
Operating profit (EBDIT) 469 867 85.0% 555 1,335 140.7%
Operating profit margin (%) 21.0% 27.8%   16.2% 24.9%  
Other income 44 26 -41.8% 133 70 -47.5%
Depreciation 108 142 31.3% 160 250 56.4%
Interest 24 45 82.8% 27 69 152.7%
Profit before tax 380 706 85.6% 500 1,086 117.0%
Tax 8 49 489.2% 52 57 10.6%
Forex gain/(loss) (501) (306)   29 (807)  
Profit after tax/(loss) (129) 351 -372.3% 478 222 -53.4%
Share of profit to associates 4 23 452.4% - 27  
Minority Interest - 2   - 2  
Net profit (125) 373   478 248 -48.1%
Net profit margin (%) -5.6% 11.9%   13.9% 4.6%  
No. of shares (m)       37.8 38.0  
Diluted earnings per share (Rs)*         21.2  
P/E ratio (x)*         12.7  
* On a trailing 12-month basis

What has driven performance in 2QFY09?
  • Mindtree recorded a 40% QoQ growth in topline during 2QFY09, aided by IT service segment (which grew by 15% QoQ) and acquisition of Aztecsoft, which contributed to 18% of the revenues in this quarter. Growth in the IT service segment was mainly driven by application, development and maintenance services. These services account for 78% of total revenues of the IT service segment. Package implementation and IP licencing also witnessed remarkable growth during the quarter.

    The second services segment of R&D recorded growth of 11% QoQ in sales during the quarter. The maximum growth has been observed in consumer appliance division of R&D services. The management has indicated in the conference call that this segment will be growing significantly going forward.

  • Mindtree added 22 new clients during 2QFY09. The company now has 206 active customers. It added 321 employees (gross) during the quarter, thereby taking the total employee strength to 5,746 at the end of June 2008. The attrition rate has come down to 15% from 16.3% in the previous quarter.

    Segmental Performance
    (Rs m) 1QFY09 2QFY09 Change
    IT Services-Revenues 1,755 2,022 15.2%
    % of total revenues 78.5% 64.8%  
    PBIT margins 23.7% 29.9%  
    R&D Services-Revenues 481 533 10.9%
    % of total revenues 21.5% 17.1%  
    PBIT margins 11.4% 23.9%  
    Aztecsoft Business revenues 0 565.8 -
    % of total revenues 0 18.1%  
    PBIT margins 0 27.5%  
    Total Revenue 2,236 3,120  

  • Mindtree’s operating margins expanded by 7% QoQ during 2QFY09 aided by depreciation of rupee against the US dollar and better utilisation. Utilisation (including trainees) increased to 70.2% during the quarter as compared to 65.6% in 1QFY09.

  • Mindtree reported a net profit during 2QFY09 against a net loss in 1QFY09. This growth can mainly be attributed to favorable rupee movement and lower forex losses. The bottomline has also grown on account of addition of profits of Aztecsoft.

What to expect?
At the current price of Rs 276, the stock is trading at a multiple of 9.1 times our estimated FY11 earnings. The management has indicated that it expects some stability in volume growth and billing rates during the quarter. It has also reiterated its confidence of achieving the stated FY09 guidance (of US$ 228 m to US$ 238 m in revenues) on the back on healthy pipeline. The management has also indicated that it has not seen any cancellations of deals as of now. However it is cautious about the current financial crisis.

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