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Mindtree (MTCL)
Technology
4QFY11E likely to be weak; structural challenges force sharp EPS cut. Our
discussions with MindTree management suggest a likely poor March 2011 quarter with
flat (at-best) revenues and flat margins (at the reported 11.7% for 3QFY11) qoq. Even
as the company attributes the poor quarter to sharp US$2.5 mn qoq revenue decline at
Kyocera, (1) ex-Kyocera revenue growth at 2-3% qoq is below-par as well, and (2)
4QFY11E margins reflect underlying OPM. We cut our FY2012/13E EPS estimates by
~18% each and reduce our target price to Rs370/share (Rs500 earlier). REDUCE.
4QFY11E likely to be a weak quarter
Our discussions with MT management indicate a poor March 2011 quarter for the company.
Revenues are likely to end up marginally down or at-best flat qoq. Margins are also likely to remain
flat qoq at the reported 11.7% levels in 3QFY11 – in effect a qoq decline of 370 bps from the
adjusted 15.4% underlying OPM for 3Q (reported EBITDA in 3QFY11 was impacted to the tune of
US$3.2 mn on account of products business closure).
Management has indicated a sharp decline in the Kyocera account – to US$1.5 mn from US$4 mn
in 3QFY11. Kyocera has cancelled a fixed-price project with MindTree. Margins also take a brunt,
in addition to revenues, as (1) the project was cancelled only in the first week of March; MT had
worked on the engagement for the months of January and February, and (2) MT would continue
to bear the cost of resources on the Kyocera account with no associated revenues, for now.
Lost business pertains to the Kyocera wireless India acquisition
MT had acquired the India R&D center of Kyocera wireless in September 2009 for a consideration
of US$6 mn. The entity had a headcount of 600 and revenues of US$4.5-5 mn a quarter at the
time of acquisition. Revenues have been in a declining phase for the past few quarters and MT
does not see an uptick in business from Kyocera, at least in the near term. We also note that
capabilities acquired as part of the acquisition prompted MT to dabble in the wireless handsets
space – an experiment that cost the company ~US$10 mn.
Poor FY2011E exit forces sharp EPS estimate cuts; reiterate REDUCE
MT is likely to end FY2011E with an exit quarter yoy revenue growth rate of ~14%, substantially
lower than industry average. More importantly, 4QFY11E margins of ~12% should be seen as
underlying business margins (no one-offs in these). We also note the growth challenge on the
R&D/SPE side of the business (41% of revenues) and cut our EPS estimates for FY2012E and
FY2013E to Rs33.8 (41.5 earlier) and Rs38.4 (46.9 earlier), respectively (driven by both revenue as
well as margin downgrade, see Exhibit 1). TP cut to Rs370/share (from Rs500). Reiterate REDUCE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mindtree (MTCL)
Technology
4QFY11E likely to be weak; structural challenges force sharp EPS cut. Our
discussions with MindTree management suggest a likely poor March 2011 quarter with
flat (at-best) revenues and flat margins (at the reported 11.7% for 3QFY11) qoq. Even
as the company attributes the poor quarter to sharp US$2.5 mn qoq revenue decline at
Kyocera, (1) ex-Kyocera revenue growth at 2-3% qoq is below-par as well, and (2)
4QFY11E margins reflect underlying OPM. We cut our FY2012/13E EPS estimates by
~18% each and reduce our target price to Rs370/share (Rs500 earlier). REDUCE.
4QFY11E likely to be a weak quarter
Our discussions with MT management indicate a poor March 2011 quarter for the company.
Revenues are likely to end up marginally down or at-best flat qoq. Margins are also likely to remain
flat qoq at the reported 11.7% levels in 3QFY11 – in effect a qoq decline of 370 bps from the
adjusted 15.4% underlying OPM for 3Q (reported EBITDA in 3QFY11 was impacted to the tune of
US$3.2 mn on account of products business closure).
Management has indicated a sharp decline in the Kyocera account – to US$1.5 mn from US$4 mn
in 3QFY11. Kyocera has cancelled a fixed-price project with MindTree. Margins also take a brunt,
in addition to revenues, as (1) the project was cancelled only in the first week of March; MT had
worked on the engagement for the months of January and February, and (2) MT would continue
to bear the cost of resources on the Kyocera account with no associated revenues, for now.
Lost business pertains to the Kyocera wireless India acquisition
MT had acquired the India R&D center of Kyocera wireless in September 2009 for a consideration
of US$6 mn. The entity had a headcount of 600 and revenues of US$4.5-5 mn a quarter at the
time of acquisition. Revenues have been in a declining phase for the past few quarters and MT
does not see an uptick in business from Kyocera, at least in the near term. We also note that
capabilities acquired as part of the acquisition prompted MT to dabble in the wireless handsets
space – an experiment that cost the company ~US$10 mn.
Poor FY2011E exit forces sharp EPS estimate cuts; reiterate REDUCE
MT is likely to end FY2011E with an exit quarter yoy revenue growth rate of ~14%, substantially
lower than industry average. More importantly, 4QFY11E margins of ~12% should be seen as
underlying business margins (no one-offs in these). We also note the growth challenge on the
R&D/SPE side of the business (41% of revenues) and cut our EPS estimates for FY2012E and
FY2013E to Rs33.8 (41.5 earlier) and Rs38.4 (46.9 earlier), respectively (driven by both revenue as
well as margin downgrade, see Exhibit 1). TP cut to Rs370/share (from Rs500). Reiterate REDUCE.
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