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MindTree Ltd. Underweight
MINT.BO, MTCL IN
Co-founder and Chairman announces intent to quit the company and chairmanship of its board; timing is unfortunate for MindTree
• Event: Mr. Ashok Soota has announced intent to quit MindTree (the company
he co-founded just over 10 years ago) and resign from the chairmanship from
the company's board effective April 2011. He intends to start a new venture.
Mr. Soota has been synonymous with MindTree ever since its founding.
• Implications for MindTree are negative. We see this event as unfortunate for
the company as the company has been struggling with a host of issues,
including tepid growth. At this juncture in the company's history, it could have
benefited from the experience and strategic wisdom of its principal co-founder.
• A host of issues affecting MindTree at present. While the company has a
well-settled operating management structure (CEO/MD, CFO, Head-IT Services
and R&D), we believe that the company's recent history is laden with mis-steps
and difficulties with the result that the company is unable to keep pace with
industry growth. Some examples of the difficulties that the company is facing
include
o high attrition (over 35% quarterly annualized attrition for the
Dec-10 quarter),
o inability to make inroads into service lines such as enterprise
solutions, infra management and BPO, increasingly, the
important growth drivers for Indian IT,
o vulnerability to significant margin downsides in FY12 as a result
of wage inflation (more than 60% of MindTree's employee costs
are offshore costs). MindTree will need to grow revenues 25-
30% to stand still on absolute EBIT Y/Y on account of the
margin pressures exerted by wage inflation,
o slower R&D/SPE segments (~40% of 3QFY11revenues) could
remain a relative revenue growth drag for MindTree,
o retracting from its decision to invest in developing smart phones
for the Android-platform after making an initial investment, this
testifies to some element of strategic inconsistency, in our view.
• Investment view. Stay UW on MindTree. It is tempting to view the valuations
as compelling in relation to that of top-tier such as TCS/Infosys. The reversion
to mean valuation discount is normally cited in the case of Indian IT mid-caps.
As a pack they are generally trading at valuations 40-60% below TCS/Infosys.
That said, competing today on growth/margins has also become more difficult
for them (more so the undifferentiated, generic mid-cap such as MindTree). For
this reason, we are more careful about using the reversion to mean valuation
discount theory in citing investment opportunities in Indian IT in the mid-cap
space. We retain our UW rating on MindTree.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree Ltd. Underweight
MINT.BO, MTCL IN
Co-founder and Chairman announces intent to quit the company and chairmanship of its board; timing is unfortunate for MindTree
• Event: Mr. Ashok Soota has announced intent to quit MindTree (the company
he co-founded just over 10 years ago) and resign from the chairmanship from
the company's board effective April 2011. He intends to start a new venture.
Mr. Soota has been synonymous with MindTree ever since its founding.
• Implications for MindTree are negative. We see this event as unfortunate for
the company as the company has been struggling with a host of issues,
including tepid growth. At this juncture in the company's history, it could have
benefited from the experience and strategic wisdom of its principal co-founder.
• A host of issues affecting MindTree at present. While the company has a
well-settled operating management structure (CEO/MD, CFO, Head-IT Services
and R&D), we believe that the company's recent history is laden with mis-steps
and difficulties with the result that the company is unable to keep pace with
industry growth. Some examples of the difficulties that the company is facing
include
o high attrition (over 35% quarterly annualized attrition for the
Dec-10 quarter),
o inability to make inroads into service lines such as enterprise
solutions, infra management and BPO, increasingly, the
important growth drivers for Indian IT,
o vulnerability to significant margin downsides in FY12 as a result
of wage inflation (more than 60% of MindTree's employee costs
are offshore costs). MindTree will need to grow revenues 25-
30% to stand still on absolute EBIT Y/Y on account of the
margin pressures exerted by wage inflation,
o slower R&D/SPE segments (~40% of 3QFY11revenues) could
remain a relative revenue growth drag for MindTree,
o retracting from its decision to invest in developing smart phones
for the Android-platform after making an initial investment, this
testifies to some element of strategic inconsistency, in our view.
• Investment view. Stay UW on MindTree. It is tempting to view the valuations
as compelling in relation to that of top-tier such as TCS/Infosys. The reversion
to mean valuation discount is normally cited in the case of Indian IT mid-caps.
As a pack they are generally trading at valuations 40-60% below TCS/Infosys.
That said, competing today on growth/margins has also become more difficult
for them (more so the undifferentiated, generic mid-cap such as MindTree). For
this reason, we are more careful about using the reversion to mean valuation
discount theory in citing investment opportunities in Indian IT in the mid-cap
space. We retain our UW rating on MindTree.
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