MindTree: Revenues/attrition disappoint :: Kotak Securities

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Mindtree (MTCL)
Technology
Revenues/attrition disappoint. Even as higher-than-expected other income and
lower-than-expected ETR aided core net income beat, sub-par rev growth, weak
outlook for the R&D services business, and sustained high attrition keep us Cautious on
FY2012E growth outlook for MindTree. High attrition (35%+ quarterly annualized) will
likely make the twin target of robust revenue growth and meaningful margin expansion
challenging in FY2012E. We broadly maintain our estimates. Reiterate REDUCE.
3QFY11 – subdued quarter on revenues, core business margins surprise a tad
MindTree reported a 3.5% qoq growth in US$ revenues to US$85.3 mn, missing our estimate by
1.8%. Core business margins at 15.5%, adjusted for wireless products business losses, came in
higher than our estimated 14.7% leading to nearly in-line EBITDA performance. Core net income
of Rs472 mn came in 21% higher than our estimate, on the back of higher-than-expected forex
gains and lower-than-expected tax rate for the quarter.
A closer look at reported volume/pricing dynamics
Volumes were flat for the quarter with reported realization increase (3.5%) contributing to entire
of the reported revenue growth. We note that reported realization number for the quarter
benefitted from (1) one-time IP licensing revenues of US$0.6 mn (70 bps positive impact on
revenues), (2) cross-currency benefit and (3) mismatch in volume units used for reported (billed
hours) and those used for billing in some contracts (fixed price per month); essentially, lower
number of billing days impacted reported billed hours without impacting billing on fixed-monthlyrate
based client contracts.
Non-ITS businesses remain a weak spot; sustained high attrition a worry as well
Management commentary once again indicated a positive outlook on the IT services segment and
a cautious tone on the R&D/SPE segments. Slower R&D/SPE segments (~41% of 3QFY11revenues)
could remain a relative revenue growth drag for MindTree. In addition, high attrition (35%+ for
the second quarter running) remains a worry – this makes achieving the twin target of robust
revenue growth and margin expansion in FY2012E extremely challenging in our view, given that
the industry remains in a tight supply environment.
Broadly maintain estimates; reiterate REDUCE
We build in moderately better margins than earlier and make modest changes to our EPS
estimates which now stand at Rs41.5 for FY2012E and Rs46.9 for FY2013E. We note that our
FY2012E revenue growth assumption of 22% is still on the aggressive side. Reiterate our REDUCE
rating on the stock with a TP of Rs500/share (12X FY2012E EPS).