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MindTree
Flat volume growth, one-offs save the day; maintain Sell
MindTree’s 3QFY11 revenue grew 0.1% qoq (rupee terms) and
3.5% qoq (US dollars). Volume growth was flat, and pricing
growth was 3.7% qoq due to license fee of US$.6m. Net profit
rose 30.7% qoq (albeit down 42.5% yoy) led by one-off gains.
Key points. Geographically, Europe was up 11.7% and America
down 1%. Attrition stood at 24.2% in 3QFY11 vs. 21.9% in
2QFY11. Utilization including trainees was 69.3%, down 70bps on
qoq basis. The company saw gross employee addition of 1,021 in
the quarter; net addition was at 87. For FY12, it targets hiring 2,000
freshers. Its application development business was down 6.2% qoq.
Business from next-in-wireless (NIW) is expected to decline.
One-off gains. MindTree’s wireless business was amalgamated
with the parent, effective 1 Apr ’11, thereby enabling the company
to absorb the US$1.5m loss in its wireless business and hence gain
tax benefits. Forex gains stood at `79m. Restructuring cost of the
handset business was US$3.7m vs. company and our estimate of
US$14m.
Change in estimates. We tweak our FY11e, FY12e and FY13e
adj EPS by -2.7%, 1.6% and 1.8% to account for one-off items; our
new adj EPS estimates are `32.2, `41.2 and `49.3 respectively.
Valuation and risks. We retain our target price of `490, on target
PE of 12x FY12e adjusted EPS of `41.2, which is at 35% discount
to average large-cap FY12e target multiple and in line with mid-cap
peers’. Risks: rise in billing rates; higher-than-expected margin.
Results Review
MindTree’s 3QFY11 revenue grew 0.1% qoq (rupee terms) and 3.5%
qoq (US dollars). Volume growth was flat, and pricing growth was
3.7% qoq due to license fee of US$.6m. Net profit rose 30.7% qoq
(albeit down 42.5% yoy) led by one-off gains.
Revenue analysis
3QFY11 revenue stood at `3.85bn, in line with our estimate, in rupee
terms. The average rupee-US dollar rate realized for 3QFY11 was 45.1.
In US dollar terms, revenue was US$85.25m, a 3.5% qoq increase,
albeit lower than our expectation of US$88.4m.
Revenue of US$0.6m came by way of one-off IPR sale.
EBITDA margin
EBITDA margin stood at 11.7%, down 813bps yoy (flat qoq) mainly
owing to write-off related to the products business; excluding the products
business, margin was down 440bps yoy.
Non-operating items
Other income – Other income stood at `6m (our estimate: `3m). Forex
gain for the quarter was `79m (our estimate: `45m).
Effective tax rate – The tax rate was 9.6% (our assumption: 17%). The
main reason for the drop in tax rate was the one-off tax benefit on account
of absorption of loss of US$1.5m on the merger of the company’s
subsidiary MindTree Wireless with the parent, effective 1 Apr ’10.
Net profit growth
Net profit stood at `305m, down 42.5% yoy and up 30.7% qoq.
Other key points
Geographically, America was down 1%, Europe grew 11.7%, while
India and ROW were up 1.9% and 17% respectively on a qoq basis.
Attrition stood at 24.2% in 3QFY11, up from 10.7% in 3QFY10 and
21.9% in 2QFY11.
Utilization including trainees was 69.3%, down 70bps qoq. The
company saw gross employee addition of 1,021 in the quarter; net
addition was 87.
Debtor days in 3QFY11 stand at 68 as against 76 in 2QFY11.
Management implied that its FY14 target of becoming a US$1bnrevenue
company is unlikely to be met and the new timeline would be
announced soon.
Its application development business was down 6.2% qoq, which is
not in line with management comment of increase in discretionary
spend by clients.
MindTree Wireless was amalgamated with the parent, effective 1 Apr
’11, thereby enabling MindTree to absorb the loss of US$1.5m in its
wireless business and hence gain tax benefits.
MindTree wireless saw a 4% dip in revenue qoq to US$4m. Going
forward, it is expected to see further revenue decline in the NIW
business as Kyocera has lost one of its important clients (which
contributed to MindTree’s business).
Total restructuring cost of the handset business was US$3.7m, of
which US$3.2m was allocated under ‘direct & other costs’, while
US$0.5m was charged below ‘operating profit’.
The restructuring cost was significantly lower, at US$3.7m, compared
with the earlier estimate of US$12-14m. This was mainly owing to
better negotiations with vendors/suppliers and lower-than-expected
assets write-off.
Hedge book stands at US$156m at Rs45/US$.
The company expects hiring 2,000 freshers in FY12e.
Change in estimates
We tweak our FY11e, FY12e and FY13e adj EPS by -2.7%, 1.6% and
1.8% to account for one-off items; our new adj EPS estimates are
`32.2, `41.2 and `49.3 respectively. We maintain our target price of
`490/share and our Sell on the stock.
Major estimate changes
The rupee-US dollar conversion rate for 3QFY11 stood at 45.1.
Hence, the average rupee-US dollar conversion rate for FY11 changed
to 45.5 from 45.1 earlier. We have assumed a rate of `44/US$ for
4QFY11 and FY12/13.
The increase in EBITDA and margin is largely due to write-back of
restructuring cost.
Adj FDEPS is after removing extraordinary items related to the
handset business.
Valuation
We expect adj FDEPS of `32.2 and `41.2 in FY11e and FY12e
respectively. We retain our target price of `490/share for MindTree, based
on target PE of 12x FY12e adjusted EPS of `41.2, which is at 35%
discount to average large-cap FY12e target multiple and in line with midcap
peers’. Our average FY12e target PE for large-caps stands at 18.8x.
Risks
Higher-than-expected margin. MindTree is seeing margin pressure
due to increase in employee cost and high attrition; any reversal would
enhance margin.
Rise in billing rates. We have factored in flat growth in billing rates.
Any substantial increase in the rates will be detrimental to our
estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree
Flat volume growth, one-offs save the day; maintain Sell
MindTree’s 3QFY11 revenue grew 0.1% qoq (rupee terms) and
3.5% qoq (US dollars). Volume growth was flat, and pricing
growth was 3.7% qoq due to license fee of US$.6m. Net profit
rose 30.7% qoq (albeit down 42.5% yoy) led by one-off gains.
Key points. Geographically, Europe was up 11.7% and America
down 1%. Attrition stood at 24.2% in 3QFY11 vs. 21.9% in
2QFY11. Utilization including trainees was 69.3%, down 70bps on
qoq basis. The company saw gross employee addition of 1,021 in
the quarter; net addition was at 87. For FY12, it targets hiring 2,000
freshers. Its application development business was down 6.2% qoq.
Business from next-in-wireless (NIW) is expected to decline.
One-off gains. MindTree’s wireless business was amalgamated
with the parent, effective 1 Apr ’11, thereby enabling the company
to absorb the US$1.5m loss in its wireless business and hence gain
tax benefits. Forex gains stood at `79m. Restructuring cost of the
handset business was US$3.7m vs. company and our estimate of
US$14m.
Change in estimates. We tweak our FY11e, FY12e and FY13e
adj EPS by -2.7%, 1.6% and 1.8% to account for one-off items; our
new adj EPS estimates are `32.2, `41.2 and `49.3 respectively.
Valuation and risks. We retain our target price of `490, on target
PE of 12x FY12e adjusted EPS of `41.2, which is at 35% discount
to average large-cap FY12e target multiple and in line with mid-cap
peers’. Risks: rise in billing rates; higher-than-expected margin.
Results Review
MindTree’s 3QFY11 revenue grew 0.1% qoq (rupee terms) and 3.5%
qoq (US dollars). Volume growth was flat, and pricing growth was
3.7% qoq due to license fee of US$.6m. Net profit rose 30.7% qoq
(albeit down 42.5% yoy) led by one-off gains.
Revenue analysis
3QFY11 revenue stood at `3.85bn, in line with our estimate, in rupee
terms. The average rupee-US dollar rate realized for 3QFY11 was 45.1.
In US dollar terms, revenue was US$85.25m, a 3.5% qoq increase,
albeit lower than our expectation of US$88.4m.
Revenue of US$0.6m came by way of one-off IPR sale.
EBITDA margin
EBITDA margin stood at 11.7%, down 813bps yoy (flat qoq) mainly
owing to write-off related to the products business; excluding the products
business, margin was down 440bps yoy.
Non-operating items
Other income – Other income stood at `6m (our estimate: `3m). Forex
gain for the quarter was `79m (our estimate: `45m).
Effective tax rate – The tax rate was 9.6% (our assumption: 17%). The
main reason for the drop in tax rate was the one-off tax benefit on account
of absorption of loss of US$1.5m on the merger of the company’s
subsidiary MindTree Wireless with the parent, effective 1 Apr ’10.
Net profit growth
Net profit stood at `305m, down 42.5% yoy and up 30.7% qoq.
Other key points
Geographically, America was down 1%, Europe grew 11.7%, while
India and ROW were up 1.9% and 17% respectively on a qoq basis.
Attrition stood at 24.2% in 3QFY11, up from 10.7% in 3QFY10 and
21.9% in 2QFY11.
Utilization including trainees was 69.3%, down 70bps qoq. The
company saw gross employee addition of 1,021 in the quarter; net
addition was 87.
Debtor days in 3QFY11 stand at 68 as against 76 in 2QFY11.
Management implied that its FY14 target of becoming a US$1bnrevenue
company is unlikely to be met and the new timeline would be
announced soon.
Its application development business was down 6.2% qoq, which is
not in line with management comment of increase in discretionary
spend by clients.
MindTree Wireless was amalgamated with the parent, effective 1 Apr
’11, thereby enabling MindTree to absorb the loss of US$1.5m in its
wireless business and hence gain tax benefits.
MindTree wireless saw a 4% dip in revenue qoq to US$4m. Going
forward, it is expected to see further revenue decline in the NIW
business as Kyocera has lost one of its important clients (which
contributed to MindTree’s business).
Total restructuring cost of the handset business was US$3.7m, of
which US$3.2m was allocated under ‘direct & other costs’, while
US$0.5m was charged below ‘operating profit’.
The restructuring cost was significantly lower, at US$3.7m, compared
with the earlier estimate of US$12-14m. This was mainly owing to
better negotiations with vendors/suppliers and lower-than-expected
assets write-off.
Hedge book stands at US$156m at Rs45/US$.
The company expects hiring 2,000 freshers in FY12e.
Change in estimates
We tweak our FY11e, FY12e and FY13e adj EPS by -2.7%, 1.6% and
1.8% to account for one-off items; our new adj EPS estimates are
`32.2, `41.2 and `49.3 respectively. We maintain our target price of
`490/share and our Sell on the stock.
Major estimate changes
The rupee-US dollar conversion rate for 3QFY11 stood at 45.1.
Hence, the average rupee-US dollar conversion rate for FY11 changed
to 45.5 from 45.1 earlier. We have assumed a rate of `44/US$ for
4QFY11 and FY12/13.
The increase in EBITDA and margin is largely due to write-back of
restructuring cost.
Adj FDEPS is after removing extraordinary items related to the
handset business.
Valuation
We expect adj FDEPS of `32.2 and `41.2 in FY11e and FY12e
respectively. We retain our target price of `490/share for MindTree, based
on target PE of 12x FY12e adjusted EPS of `41.2, which is at 35%
discount to average large-cap FY12e target multiple and in line with midcap
peers’. Our average FY12e target PE for large-caps stands at 18.8x.
Risks
Higher-than-expected margin. MindTree is seeing margin pressure
due to increase in employee cost and high attrition; any reversal would
enhance margin.
Rise in billing rates. We have factored in flat growth in billing rates.
Any substantial increase in the rates will be detrimental to our
estimates.
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