Visit http://indiaer.blogspot.com/ for complete details Key result highlights
• Healthy revenues; margins a miss – MindTree reported revenues of US$83m (+7% qoq and +26% yoy) ahead of
IDFC exp. of US$81m. Revenue growth was driven by volume growth of ~8.2% while price realization declined by
~0.8%. Sequentially EBITDA margins declined by 100bp to 11.6% (IDFC exp of 55bp decline) led by higher product
losses and partial wage hikes. Net profit was Rs232m (+47% qoq and -53% yoy) vs. IDFC exp of Rs304m.
• Product bets turn sour – Company has decided to exit out of the product business as market conditions have
deteriorated and now entailed higher investment requirement (vs. company’s previous estimates). The handset
product will be completely dumped while 4G infra IP will be used for design services and IP licensing. Beyond the
initial investment of around US$5.5 m in last 8 months, company expects business closure costs of up to US$12m-
14m (related to employee severance, cancelled purchase orders, etc) – to be incurred in 2HFY11.
• Services business on track – MindTree’s core services business continues to show traction – the company reported
volume led revenue growth of ~7% with EBITDA margin expansion of ~110bp qoq. We expect services business to
continue to grow well as it is levered to discretionary IT spend.
• Other highlights – MindTree added 1,373 employees on gross basis (comparable to previous quarter), LTM attrition
inched up to ~22%. Company added 6 new Fortune 500 accounts during the quarter. Sequentially, revenues from
Europe and India grew by 13-14% while US and RoW grew by 5-6%.
• Estimates revision – We raise recurring net profit/ EPS estimates for MindTree by ~20% and ~15% for FY11 and FY12
respectively. However, accounting for product business closure costs, we reduce our reported FY11E EPS by ~38%.
Valuations and View: While the unexpected closure costs will weigh on the stock in near term, there is limited
downside as its valuations are amongst the lowest in comparison to peers. Even after ascribing negative US$15m value to
product business, services business valuations are at ~8x FY11E and ~6x FY12E EV/EBITDA. Also, we see overhang of
investor concerns (unrelated diversification into product business) gets cleared. We expect to see volume growth and
margin expansions in the services business to continue in coming quarters. We value MindTree for a 12 month target
price at Rs680 – based on 14x FY12E EPS (from Rs790 based on SOTP methodology earlier). Target multiple of 14x is at
~40% discount to Tier1 IT target multiple and ~13% discount to target multiple for HCL Tech. Trading at ~16x FY11E and
~12x FY12E EPS, we maintain MindTree stock as Outperformer (~30% upside from CMP).
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