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MindTree: Other income fillip

Oct 24, 2007

Performance summary
  • Topline expands by 13% QoQ during 2QFY08, largely due to 13% QoQ increase in volumes and 3% QoQ improvement in billing rates.

  • Operating margins expands by 0.4% QoQ - higher volumes and pricing along with 4% QoQ rise in utilisation helps profitability.

  • PAT grows by 32% QoQ during the second quarter – aided by margin expansion and higher other income.

  • Adds 28 new clients and 464 employees in 2QFY08. Annualised attrition up 0.5% to 15.7%.

(Rs m) 1QFY08 2QFY08 Change 1HFY07 1QFY08 Change
Sales 1,615 1,820 12.7% 2,870 3,435 19.7%
Expenditure 1,359 1,524 12.1% 2,308 2,884 24.9%
Operating profit (EBDIT) 256 295 15.5% 562 551 -1.9%
Operating profit margin (%) 15.8% 16.2%   19.6% 16.0%  
Other income 62 103 64.5% 26 165 530.3%
Depreciation 79 81 2.5% 111 160 44.4%
Interest 9 18 90.0% 17 27 58.9%
Profit before tax 230 299 30.2% 460 529 15.0%
Tax 24 28 16.8% (7) 52  
Profit after tax/(loss) 206 271 31.7% 467 477 2.3%
Net profit margin (%) 12.8% 14.9%   16.3% 13.9%  
No. of shares (m)         37.8  
Diluted earnings per share (Rs)*         24.1  
P/E ratio (x)*         21.8  

What is the company business?
MindTree Consulting is a mid-size Indian IT and R&D services company. The company has two business units that focus on software development – IT Services and R&D Services. Around 76.5% of the revenues come from IT services and the balance 23.5% come from R&D services. It has offices in the US, UK, Germany, Switzerland, UAE, India, Singapore, Australia and Japan. MindTree’s IT services business comprises of IT strategic consulting, application development, data warehousing and business intelligence, application maintenance, package implementation and application product engineering. The R&D services division is organized into two sub-divisions: Engineering, which provides product realisation services to technology and product firms including product architecture, product design, and product re-engineering and product assurance. Research, which conceives and develops intellectual property in short range wireless communication segment, licenses and customizes those intellectual property for the clients.

What has driven performance in 2QFY08?
Volume growth drives topline: MindTree recorded a 13% QoQ topline growth during 2Qfy08, largely due to 13% QoQ growth in volumes and 3% QoQ growth in pricing. Onsite volumes grew by 6% QoQ while the growth in offshore volumes was 14% QoQ. Onsite billing rates went up by 3% QoQ while offshore billing rates were up by 4% QoQ. The IT services segment recorded a 13% QoQ growth in sales. R&D services, which were lagging in 1QFY08, recorded a 13% QoQ growth during the second quarter. The onsite revenue proportion has come down by 2% QoQ in 2QFY08.

In terms of geographies, US recorded a growth of 8% QoQ whereas India, Europe and Asia Pacific regions recorded growth of 39%, 24% and 16% respectively. The company in a bid to strengthen its position in Europe opened a center in the Netherlands.

R &D Service offerings 1QFY08 % of total 2QFY08 % of total Change
Storage and servers 147 40.6% 160 39.2% 9.2%
Consumer appliances 97 26.9% 112 27.4% 15.2%
Communication systems 38 10.6% 45 11.0% 17.4%
Automotive and industrial systems 65 18.1% 78 19.1% 19.3%
Others 14 3.8% 13 3.3% -1.8%
Total 362 100.0% 409 100.0% 13.1%
IT Service offerings 1QFY08 % of total 2QFY08 % of total Change
ADM 1,078 86.0% 1,195 84.7% 10.8%
Consulting 60 4.8% 48 3.4% -20.3%
Package implementation 21 1.7% 54 3.8% 151.6%
Testing 44 3.5% 66 4.7% 51.1%
IMS 49 3.9% 45 3.2% -7.7%
IP licensing 1 0.1% 3 0.2% 125.1%
Total 1,254 100.0% 1,411 100.0% 12.5%

In terms of business segment, while Transportation and Hi-tech segments recorded growth of 11% QoQ apiece, the growth in banking and financial services segment was little lower at 9% QoQ. Growth in the manufacturing segment was 13% QoQ in 2QFY08. MindTree added 28 new clients and a net off 464 (gross 784) employees in 2QFY08. The attrition levels have gone up by 0.5% in 2QFY08 to 15.7%. This is a worrying factor as, three quarters back, the company was among those that had the lowest attrition levels.

Marginal expansion in operating margins: MindTree’s operating margins expanded by 0.4% QoQ during 2QFY08. This was aided by a 4% QoQ increase in utilisation levels and 2% QoQ fall in SG&A expenses (as percentage of sales). The cost of revenues (as percentage of sales) increased from 63% in 1QFY08 to nearly 65% in 2QFY08. This was mainly due to partial wage hike affected during the quarter. In 1QFY08, the company had affected a wage hike to 53% of its junior offshore employees, which contributed to 40% of the total workforce. Now in 2QFY08, the company has given salary hikes to 53% of the employees and remaining 7% of the employees will get their salary hikes in 3QFY08. So the impact of hike in wages will be spread over the financial year. The impact of salary hikes given on EBITDA margins in 2QFY08 was 2.5% QoQ.

Segmental Performance
(Rs m) 1QFY08 2QFY08 Change
IT Services-Revenues 1,254 1,411 12.5%
% of total revenues 77.6% 77.5%  
PBIT margins 19.3% 17.1%  
R&D Services-Revenues 362 409 13.1%
% of total revenues 22.4% 22.5%  
PBIT margins 4.5% 14.3%  
  1,615 1,820 12.7%

Higher other income boosts bottomline: MindTree’s PAT increased by 32% QoQ largely during the second quarter. This was due to a 65% QoQ growth in other income. PAT margins also expanded by 2.2% QoQ. On a YoY basis, other income has risen by 300%. This is mainly because the company had higher investments due to proceeds from IPO. The company also recorded a forex gain of Rs 33 m in 2QFY08 as against a loss of Rs 4 m in 1QFY08. This gain was mainly due to mark-to-market adjustments on forward contracts on the basis of hedge accounting.

What to expect?
At the current price of Rs 525, the stock is trading at a multiple of 11 times our FY10 estimated earnings. The company has reiterated the FY08 guidance (given at the end of 1QFY08) of topline of US$ 178 m to US$ 180 m and bottomline performance of US$ 22.5 m to US$ 22.6 m. On the positive side, the R&D division has taken off nicely in this quarter and the company expects the same to continue in the next two quarters as well. While in the short run the major challenge will be to manage consistent appreciation of the rupee against the US dollar, in the long run the challenge will be in terms of containing attrition and nurturing talent.

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Dec 13, 2019 11:19 AM


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