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Mindtree: Good performance sustained - Views on News from Equitymaster
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Mindtree: Good performance sustained
Nov 3, 2014

Mindtree has announced results for the second quarter 2014-2015 (2QFY15). The company has reported a 5.3% quarter-on-quarter (QoQ) growth in sales and a 6.2% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 5.3% QoQ during 2QFY15. This is on the back of a good 4.1% QoQ revenue growth in US dollar terms.
  • The operating profits increased by 4.2% QoQ while operating margins fell by 0.2% QoQ to 19.8% compared to 20% seen during the previous quarter (1QFY15). This was due a 6.6% QoQ rise in employee expenses.
  • The company had a forex gain of Rs 102 m during the quarter. This led to a healthy other income figure of Rs 241 m; a growth of 14.8% QoQ.
  • The bottomline was boosted by the other income and a marginal decrease in the tax rate. The net profit came in at Rs 1,374 m, higher by 6.2% QoQ.
  • The company has declared a dividend of Rs 3 per share.

Financial performance snapshot
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Sales 8,435 8,886 5.3% 14,173 17,321 22.2%
Expenditure 6,750 7,131 5.6% 11,383 13,881 21.9%
Operating profit (EBITDA) 1,685 1,755 4.2% 2,790 3,440 23.3%
Operating profit margin (%) 20.0% 19.8%   19.7% 19.9%  
Other income (Including forex gain/loss) 210 241 14.8% 981 451 -54.0%
Depreciation 228 235 3.1% 378 463 22.5%
Interest - -   3 -  
Profit before tax 1,667 1,761 5.6% 3,390 3,428 1.1%
Tax 373 387 3.8% 750 760 1.3%
Profit after tax/(loss) 1,294 1,374 6.2% 2,640 2,668 1.1%
Net profit margin (%) 15.3% 15.5%   18.6% 15.4%  
No. of shares (m)          83.6  
Diluted earnings per share (Rs)*          54.2  
P/E ratio (x)*          19.7  
(*On a trailing twelve months)

What has driven performance in 2QFY15?
  • In terms of the operating metrics, the company witnessed broad based growth in all major verticals, service lines and geographies.

    Segmental performance
    Revenue break-up (Rs m) 1QFY15 2QFY15 Change
    On basis of industry vertical
    Manufacturing, CPG & Retail 1,788 1,919 7.3%
    BFSI 1,915 2,026 5.8%
    Travel & Hospitality 1,383 1,520 9.8%
    Hi-Tech & Media Services  2,758 2,906 5.3%
    Other 599 515 -13.9%
    On basis of geography
    US 4,994 5,367 7.5%
    Europe 2,261 2,319 2.6%
    India 295 355 20.4%
    Rest of the world 886 853 -3.7%
    On the basis of service offerings
    Development 2,041 2,133 4.5%
    Engineering 818 835 2.1%
    Maintenance 1,738 1,884 8.4%
    Consulting 321 373 16.4%
    Package Implementation 455 480 5.3%
    IP Led Revenue 143 142 -0.9%
    Independent Testing 1,324 1,377 4.0%
    Infrastructure Management & Tech Support 1,594 1,662 4.2%

  • At the operating level, the wage hikes dampened the positive impact of the currency movement as well as the improvement in employee productivity. The wage hikes will be completed in 3QFY14, thus there will be an impact on margins in the coming quarter as well.

  • At the net level, the good operating performance along with the forex gain resulted in an increase of 6.2% QoQ in the bottomline.
What to expect?

At the current price of Rs 1,070, the stock is trading at a multiple of 19.7 times of its trailing twelve months earnings.

Mind tree continued to maintain good growth momentum in the quarter. In constant currency terms, the sequential revenue growth was 4.4%. It must be kept in mind that the December quarter is a seasonally weak quarter for Indian IT firms. Thus, there may be pause in the high topline growth in the next quarter. However, the management has re-iterated their confidence of beating the NASSCOM guidance of 13-15% industry growth rate.

On the margin front, the management stated that significant margin expansion would not be possible from these levels. However, they do not see any pressure on the margins either.

The company continues to win deals across verticals. The client profile has been improving steadily for many quarters. The trend continued in this quarter as well, with the company adding to the order book which now stands at US$ 165 m.

The new digital technologies continue to be a growth driver with about US$ 63 m of deals in the order book. However, the size of individual deals still remains small. The management is hopeful of significant non-linear annuity based income from such deals in the future.

We are quite satisfied with the progress that the company is making. However, at these levels the valuations of the stock are stretched. Thus, we maintain our view that investors should not buy the stock at these high valuations.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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