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Mindtree (MTCL)
Technology
Back to basics; upgrade to ADD. 1QFY12 marks the first time in many quarters,
where Mindtree has exceeded beaten-down expectations. Revenue growth of 7.3%
qoq and absorbing the entire wage revision without impacting margins is creditable.
Focused approach, deal wins in the ITS segment and completion of ramp down from
drag accounts in R&D segment should aid strong revenue growth. Margins though
considerably lower than historical average should benefit from growth and SG&A
leverage. We upgrade our EPS estimates by 8-10% and TP to Rs430 (Rs370 earlier).
Strong revenue growth powers 1QFY12 performance
Mindtree reported 7.3% qoq growth to US$92.5 mn, 1.6% ahead of our estimate. Revenue
growth was led by ITS segment (+10.6% qoq), while product engineering services (PES)
underperformed with just 1.9% qoq growth. EBITDA margin at 11.1% was flat qoq (160 bps
ahead of our estimate), creditable since the company absorbed 2-4% onsite and 10-12% offshore
wage increase for employees representing 60% of overall salary bill. Higher-than-expected other
income and lower-than-expected ETR drove net income outperformance.
Focused strategy and solid deal wins to drive FY2012E revenue growth
Mindtree had all the building blocks for growth and scale. However, strategic missteps through
acquisition in PES and entry in handsets business deprived the company of much needed focus on
core business. Fortunately, management has gone back to basics and focused on areas of core
competence. This is reflected in recently announced deal wins and improved account mining.
Completion of ramp down from problem accounts and stabilization of PES practice will also help.
We forecast revenue growth of 20% yoy for FY2012E as well as FY2013E.
SG&A leverage may drive margin improvement
Improvement in utilization rate (+160 bps qoq), decline in non-manpower costs and nonrecurrence
of costs related to ramp down by Kyocera helped Mindtree protect margins on qoq
basis. We believe that OPM can improve from 1QFY12 on the back of (1) SG&A leverage and (2)
pricing improvement. We forecast EBITDA margin of 12.6% in FY2012E and 13.2% in FY2013E.
Upgrade to ADD, stock trades at inexpensive valuations
We raise our EPS estimate by 8/10% for FY2012E/13E to Rs36.4/42.6. We upgrade Mindtree to
ADD from REDUCE and raise our TP to Rs430, valuing the company at 10X FY2013E earnings. Our
target multiple is a far cry from ~15X levels the stock commanded just six quarter ago. Execution,
consistency on performance, focus, and consistent investor communication can help improve
valuation multiples. 1QFY12 is a good beginning in a long and challenging journey.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mindtree (MTCL)
Technology
Back to basics; upgrade to ADD. 1QFY12 marks the first time in many quarters,
where Mindtree has exceeded beaten-down expectations. Revenue growth of 7.3%
qoq and absorbing the entire wage revision without impacting margins is creditable.
Focused approach, deal wins in the ITS segment and completion of ramp down from
drag accounts in R&D segment should aid strong revenue growth. Margins though
considerably lower than historical average should benefit from growth and SG&A
leverage. We upgrade our EPS estimates by 8-10% and TP to Rs430 (Rs370 earlier).
Strong revenue growth powers 1QFY12 performance
Mindtree reported 7.3% qoq growth to US$92.5 mn, 1.6% ahead of our estimate. Revenue
growth was led by ITS segment (+10.6% qoq), while product engineering services (PES)
underperformed with just 1.9% qoq growth. EBITDA margin at 11.1% was flat qoq (160 bps
ahead of our estimate), creditable since the company absorbed 2-4% onsite and 10-12% offshore
wage increase for employees representing 60% of overall salary bill. Higher-than-expected other
income and lower-than-expected ETR drove net income outperformance.
Focused strategy and solid deal wins to drive FY2012E revenue growth
Mindtree had all the building blocks for growth and scale. However, strategic missteps through
acquisition in PES and entry in handsets business deprived the company of much needed focus on
core business. Fortunately, management has gone back to basics and focused on areas of core
competence. This is reflected in recently announced deal wins and improved account mining.
Completion of ramp down from problem accounts and stabilization of PES practice will also help.
We forecast revenue growth of 20% yoy for FY2012E as well as FY2013E.
SG&A leverage may drive margin improvement
Improvement in utilization rate (+160 bps qoq), decline in non-manpower costs and nonrecurrence
of costs related to ramp down by Kyocera helped Mindtree protect margins on qoq
basis. We believe that OPM can improve from 1QFY12 on the back of (1) SG&A leverage and (2)
pricing improvement. We forecast EBITDA margin of 12.6% in FY2012E and 13.2% in FY2013E.
Upgrade to ADD, stock trades at inexpensive valuations
We raise our EPS estimate by 8/10% for FY2012E/13E to Rs36.4/42.6. We upgrade Mindtree to
ADD from REDUCE and raise our TP to Rs430, valuing the company at 10X FY2013E earnings. Our
target multiple is a far cry from ~15X levels the stock commanded just six quarter ago. Execution,
consistency on performance, focus, and consistent investor communication can help improve
valuation multiples. 1QFY12 is a good beginning in a long and challenging journey.
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