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Mindtree: Back on growth track? - Views on News from Equitymaster

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Mindtree: Back on growth track?
Oct 26, 2009

Performance summary
  • Topline grew by 3.4% QoQ during 2QFY10.
  • Operating margins expand by 4.3% QoQ during 2QFY10, on account of a 2% decrease in expenses.
  • Bottomline declines by 12% QoQ on account of absence of income on hedges that was registered during last quarter. Excluding the other income component for both the quarter, the bottomline grew by 96% QoQ on back of increased volumes and improved margins.
  • Declares an interim dividend of Re 1 per equity share.


(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 3,048 3,150 3.4% 5,356 6,198 15.7%
Expenditure 2,541 2,491 -2.0% 4,021 5,031 25.1%
Operating profit (EBDIT) 507 659 30.1% 1,335 1,166 -12.7%
Operating profit margin (%) 16.6% 20.9%   24.9% 18.8%  
Other income 332 38 -88.4% (737) 371  
Depreciation 161 159 -1.0% 250 320 28.4%
Interest 24 1 -96.2% 69 25 -63.9%
Profit before tax 654 537 -17.9% 280 1,191 326.2%
Tax 87 39   57 126 119.4%
Profit after tax/(loss) 567 499 -12.1% 222 1,066 379.4%
Minority Interest - -   (26) -  
Net profit 567 499 -12.1% 248 1,066 329.9%
Net profit margin (%) 18.6% 15.8%   4.6% 17.2%  
No. of shares (m)   39.2   38.0 39.2  
Diluted earnings per share (Rs)*   16.6     34.2  
P/E ratio (x)*   34.5     16.7  
* On a trailing 12-month basis

What has driven performance in 2QFY10?
  • Mindtree recorded a 3.4% QoQ growth in topline during 2QFY10. This was mainly due to higher volumes in the key segments like R&D and software engineering services. The pricing remained flat for the company. Based on industry verticals, the company saw decent traction in R&D (15% of topline) and manufacturing (13% of topline) segments which grew by 11% and 7% QoQ respectively. Software Product Engineering (SPE) segment which contributes over 30% to Mindtree’s sales registered a QoQ growth of 7%. As for its travel and transportation vertical, sales declined by 6% QoQ.

  • The US continued to remain Mindtree’s largest market contributing 66% to the revenues. There was 10% growth in revenues from the European market and the same contributed about 21% to this quarter’s total revenue. However, the Indian business which contributes around 5%, saw a decline of 16% QoQ.

  • Mindtree added 24 new clients during the quarter, taking the total number of active clients to 243. The total employee strength stood at 7,450. The attrition rate at the end of the quarter stood at 9.7%, as compared to 11.4% in 1QFY10.

  • Mindtree’s operating margins expanded by 4.3% QoQ during the quarter, on account of lower expenses, headcount reduction and 3.6% improvement in utilisation levels. The company also registered a significant improvement in receivables days which stood at 70 days at the end of 2QFY10 as against 86 days during 1QFY10.

    Revenue Break-up
    (In Rs m) 1QFY10 2QFY10 Change
    On basis of segment      
    IT Services-Revenues 1,724 1,724 0.0%
    Product Engineering Services 1,324 1,426 7.7%
    On basis of industry vertical      
    Manufacturing 393 419 6.6%
    BFSI 542 548 1.0%
    Travel and transportation 460 435 -5.5%
    R & D 430 475 10.5%
    Software Product Engineering (SPE) 893 954 6.9%
    Other 329 324 -1.4%
    On basis of geography      
    US 2,051 2,085 2%
    Europe 603 661 10%
    India 198 167 -16%
    Rest of the world 195 236 21%

  • Despite improved operational performance, Mindtree’s net profit dropped by 12% during 2QFY10. This was on account of absence of a huge forex gain (Rs 332 m) registered during 1QFY10. Excluding other income, Mindtree registered a robust bottomline growth of 96% QoQ during 2QFY10.

What to expect?
At the current price of Rs 585, the stock is trading at a multiple of 7.6 times our estimated FY12 earnings. Mindtree’s management believes that the operating environment has begun to show some recovery in customer sentiment, though there continues to be uncertainty in segments like manufacturing and semi-conductors. It continues to maintain its revenue guidance for the current fiscal at the range of Rs 12,342 m to Rs 13,068 m. The net profits are expected to be in the range of Rs 1,471 m to Rs 1,781 m with an EPS estimated to be around Rs 37.4 to Rs 45.3. These estimates however exclude Aztecsoft’s numbers which the company had acquired during the previous year.

Further, Mindtree’s recent acquisition of Kyocera Wireless India (KWI) is expected to strengthen the company’s foothold in telecom segment. The management continues to expect growth in both IT services and R&D services businesses and expects to achieve its revenue and profit guidance for the year.

We had recommended the stock in November 2008, and it has already crossed our target price since then. At the current levels, we believe the stock is fairly priced.

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