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Mindtree (MTCL)
Technology
Road to margin recovery challenging. MindTree delivered a quarter in line with its
mid-quarter guidance. Even as we expect MindTree to deliver a robust 20% US$
revenue growth in FY2012E, meeting Street’s elevated estimates on margins is where
the real challenge lies. The company enters FY2012E with an exit (4QFY11) margin level
of 11.2% (no one-offs) with further cost pressure in the form of wage hikes ahead. We
broadly maintain our lower-than-consensus EPS estimates of Rs33.9 and Rs38.6 for
FY2012E and FY2013E. Retain REDUCE with a target price of Rs370/share.
4QFY11 – weak, but in line after the management’s mid-quarter warning
MindTree reported a 1.2% qoq growth in revenues to US$86.3 mn, marginally ahead of our
estimate. On guided lines, revenue growth was impacted by a US$2.5 mn qoq decline in revenues
from Kyocera wireless. Ex-Kyocera, revenue growth was a reasonable 4% qoq. EBITDA margin at
11.2% (down 420 bps on a like-on-like basis), however, disappointed coming in 90 bps below
lowered expectations. EBITDA of Rs440 mn (down 30% yoy) fell 6% short of our estimate. Higherthan-
expected other income and lower-than-expected ETR drove net income outperformance
(Rs320 mn versus our estimate of Rs277mn).
4QFY11 margins should be seen as core
We would be wary of treating 4QFY11 margins of 11.2% as having been impacted by one-off
pressure from decline in Kyocera revenues. We note that MT’s margins have declined 420 bps on a
like-on-like basis, adjusting 3QFY11 margins for one-off products losses. Margin impact of Kyocera
revenue decline should have shown up in lower utilization (in case it was a T&M project) or a sharp
decline in pricing (in case it was an FP project – this was the case) – this did not happen. MindTree
had enough margin tailwinds in the form of Re depreciation, higher utilization, cross-currency
benefits, sharp decline in quarterly annualized attrition and non-recurrence of 3QFY11’s one-off
product business costs – a 50 bps decline in reported margins in this light can not be blamed on
Kyocera revenue decline and reflects poor core margin profile, in our view.
Street’s elevated expectations on FY2012E margins too optimistic and will likely be reset
A poor exit quarter core margin level of 11.2% and expected margin pressure from high wage
hikes ahead make meeting Street’s elevated EBITDA FY2012E margin expectations of 15-17%
extremely challenging, in our view. We further reduce our already-lower-than-consensus margin
estimate for FY2012E to 12.6% from 14.1% earlier and see downside risks to this estimate as well.
Lower-than-earlier ETR assumptions prevent downgrade in our FY2012/13E EPS estimate, we
stand at Rs33.9/38.6. Retain REDUCE with a target price of Rs370/share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mindtree (MTCL)
Technology
Road to margin recovery challenging. MindTree delivered a quarter in line with its
mid-quarter guidance. Even as we expect MindTree to deliver a robust 20% US$
revenue growth in FY2012E, meeting Street’s elevated estimates on margins is where
the real challenge lies. The company enters FY2012E with an exit (4QFY11) margin level
of 11.2% (no one-offs) with further cost pressure in the form of wage hikes ahead. We
broadly maintain our lower-than-consensus EPS estimates of Rs33.9 and Rs38.6 for
FY2012E and FY2013E. Retain REDUCE with a target price of Rs370/share.
4QFY11 – weak, but in line after the management’s mid-quarter warning
MindTree reported a 1.2% qoq growth in revenues to US$86.3 mn, marginally ahead of our
estimate. On guided lines, revenue growth was impacted by a US$2.5 mn qoq decline in revenues
from Kyocera wireless. Ex-Kyocera, revenue growth was a reasonable 4% qoq. EBITDA margin at
11.2% (down 420 bps on a like-on-like basis), however, disappointed coming in 90 bps below
lowered expectations. EBITDA of Rs440 mn (down 30% yoy) fell 6% short of our estimate. Higherthan-
expected other income and lower-than-expected ETR drove net income outperformance
(Rs320 mn versus our estimate of Rs277mn).
4QFY11 margins should be seen as core
We would be wary of treating 4QFY11 margins of 11.2% as having been impacted by one-off
pressure from decline in Kyocera revenues. We note that MT’s margins have declined 420 bps on a
like-on-like basis, adjusting 3QFY11 margins for one-off products losses. Margin impact of Kyocera
revenue decline should have shown up in lower utilization (in case it was a T&M project) or a sharp
decline in pricing (in case it was an FP project – this was the case) – this did not happen. MindTree
had enough margin tailwinds in the form of Re depreciation, higher utilization, cross-currency
benefits, sharp decline in quarterly annualized attrition and non-recurrence of 3QFY11’s one-off
product business costs – a 50 bps decline in reported margins in this light can not be blamed on
Kyocera revenue decline and reflects poor core margin profile, in our view.
Street’s elevated expectations on FY2012E margins too optimistic and will likely be reset
A poor exit quarter core margin level of 11.2% and expected margin pressure from high wage
hikes ahead make meeting Street’s elevated EBITDA FY2012E margin expectations of 15-17%
extremely challenging, in our view. We further reduce our already-lower-than-consensus margin
estimate for FY2012E to 12.6% from 14.1% earlier and see downside risks to this estimate as well.
Lower-than-earlier ETR assumptions prevent downgrade in our FY2012/13E EPS estimate, we
stand at Rs33.9/38.6. Retain REDUCE with a target price of Rs370/share.
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