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MindTree Ltd
N(V): Strong quarter, but FY12 margin recovery road can
be bumpy
Early signs of recovery visible in 1Q, with strong revenue
growth and stable margin despite wage inflation
While FY12 revenue growth expectations (HSBC and
consensus) seems realistic, margin recovery is the key risk
We remain Neutral (V) and cut our TP to INR420 from INR600
Mindtree reported strong results with revenues of USD93m/ INR,4131 (up 7.3%, 5.6%,
respectively) compared to the HSBC estimate of 5.1%/3.2%. EBITDA margins surprised
positively as well at 11.1%. As expected, IT services led the growth, up 10.6% q-o-q, while
PES (product engineering services) continued to lag with 2% sequential growth. IT services’
growth was broad-based, led by banking in verticals and application maintenance in services.
Management reiterated its positive outlook on the IT services business: and has not seen
any slowdown in demand so far. The pipeline looks robust and the deal wins in the past few
quarters (particularly in the infrastructure management) space are expected to ramp-up further
in the coming quarter, according to the management. The company is looking to hire 4,000
employees in FY12 (gross) and is seeing stable pricing environment.
Margin recovery the key risk to estimates: We have forecasted exit margins (4Q12) of
14% from the current 11% (1Q). This also factors in a partial wage inflation impact of
near 130bps in 2Q. According to management, employee pyramid, and operational
efficiencies are the key margin levers. We believe campus hires in FY12 will only reduce
the average age of the organization from 5.8 years currently to 5.2 years and therefore
only provide margin lever of 60-80bp. The onus therefore is on cost cutting measures,
which remain the key risk to the estimates.
Valuation: The stock is currently trading at 9x our FY12 EPS. We cut our valuation multiple
from 12x (mid cap Indian IT historical average) to 10x on FY13 earnings owing to margin
recovery risk and the weak operational performance of the company in the past few quarters.
We cut our target price to INR420 from INR600 and reiterate our Neutral (V) rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree Ltd
N(V): Strong quarter, but FY12 margin recovery road can
be bumpy
Early signs of recovery visible in 1Q, with strong revenue
growth and stable margin despite wage inflation
While FY12 revenue growth expectations (HSBC and
consensus) seems realistic, margin recovery is the key risk
We remain Neutral (V) and cut our TP to INR420 from INR600
Mindtree reported strong results with revenues of USD93m/ INR,4131 (up 7.3%, 5.6%,
respectively) compared to the HSBC estimate of 5.1%/3.2%. EBITDA margins surprised
positively as well at 11.1%. As expected, IT services led the growth, up 10.6% q-o-q, while
PES (product engineering services) continued to lag with 2% sequential growth. IT services’
growth was broad-based, led by banking in verticals and application maintenance in services.
Management reiterated its positive outlook on the IT services business: and has not seen
any slowdown in demand so far. The pipeline looks robust and the deal wins in the past few
quarters (particularly in the infrastructure management) space are expected to ramp-up further
in the coming quarter, according to the management. The company is looking to hire 4,000
employees in FY12 (gross) and is seeing stable pricing environment.
Margin recovery the key risk to estimates: We have forecasted exit margins (4Q12) of
14% from the current 11% (1Q). This also factors in a partial wage inflation impact of
near 130bps in 2Q. According to management, employee pyramid, and operational
efficiencies are the key margin levers. We believe campus hires in FY12 will only reduce
the average age of the organization from 5.8 years currently to 5.2 years and therefore
only provide margin lever of 60-80bp. The onus therefore is on cost cutting measures,
which remain the key risk to the estimates.
Valuation: The stock is currently trading at 9x our FY12 EPS. We cut our valuation multiple
from 12x (mid cap Indian IT historical average) to 10x on FY13 earnings owing to margin
recovery risk and the weak operational performance of the company in the past few quarters.
We cut our target price to INR420 from INR600 and reiterate our Neutral (V) rating.
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