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Mindtree (MTCL)
Technology
Product business restructuring costs lower than earlier indicated. MindTree has
announced that the restructuring costs for the closure of its wireless products business
will be in the range of US$3.6-3.9 mn, substantially lower than the US$12-14 mn
indicated in 2QFY11 earnings call and even lower than the US$5-6 mn communicated
in recent management meetings. Nonetheless, the focus should now be on the core
business outlook, which looks challenging to us. We reiterate REDUCE.
Announces product business restructuring costs of US$3.6-3.9 mn
On expected lines, MindTree has announced that its wireless products business restructuring costs
will be lower than the US$12-14 mn indicated in 2QFY11 earnings call. The company’s
announcement pegs these costs at US$3.6-3.9 mn – note that this is even lower than the US$5-6
mn indicated by the management in recent interactions with the Street. The company has
attributed the positive surprise on restructuring expenses to negotiating better terms with the
vendors involved. Note that the restructuring costs include people separation costs, legal fees,
asset write-offs and penalties for cancellation of contracts with third-party vendors. The company
has also indicated that its wireless division will now focus solely on services business and that it
would take the restructuring charge in the 3QFY11 P&L.
A costly mistake comes to a closure
What started as a brave and unique attempt by an IT services company to foray into wireless
handsets business is ending as a costly mistake. In addition to the final closure-related
restructuring charge, the company had invested an additional ~US$7 mn towards bootstrapping
this business, taking the total cost of this mis-step to ~US$10 mn. Nevertheless, the closure of
what we always thought was a challenge not worth taking for MindTree is welcome.
Focus on core business now – we see a couple of areas of concern
Even as we have a bullish stance on sector revenue growth over the next 4-6 quarters and expect a
robust FY2012E, we continue to see the mid-sized companies underperforming their larger peers
on revenue growth. MindTree’s revenue growth outlook gets clouded a tad more due to its
higher-than-industry exposure to the R&D and software product engineering business, where the
growth outlook is weaker as compared to IT services business, per MT management. In addition,
we do not share management’s confidence on quick margin turnaround; management’s stated
target of 18-20% EBITDA margin for FY2012E (from 14-15% core business margins reported for
the past two quarters) appears aggressive to us. We maintain our view that margin performance
for most Indian IT companies will track relative revenue growth rate in FY2012E given tight supply
side situation. We reiterate our REDUCE rating on the stock with a target price of Rs500/share.
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