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Solid 2Q, but risks remain
RESULTS REVIEW
Pricing gains help revenue beat, hedges help bottom line
MindTree reported a stronger-than-expected 2QFY12 with USD revenue
up 9.5% q-q (BNPP: 5.6%) largely on higher pricing (+3.1% q-q). But the
EBITDA came in only 1.5% ahead of our view as higher wage costs, onsite
revenue shift and SG&A expenses took away some of the revenue gains.
The big 48% EPS beat was driven by hedging and non-operational gains.
SUMMARY
Signs that back-to-basics strategy is paying off
IT services (10.1% q-q) led the growth, while product engineering services
(PES, 36% of revenue) grew 8.5% after several slow quarters. On the face
of it, it appears the focus on core accounts (active clients declined 13 q-q)
is paying off. However, management indicated a likely seasonally muted
3Q and slowing growth from consumer and semiconductor PES clients.
VALUATION
Reasons to believe some of the gains are not sustainable
Despite the positives – 1,000+ net hires, pricing gains, likely further
margin gains on operational efficiencies, falling attrition (21.7% vs 25.6%
in 1Q) – we believe the high 2Q growth is not sustainable. Over half of the
incremental revenue came from the top 2-5 client bracket (up 28.5% q-q)
and from Europe (up 23.7% q-q). Moreover, one large IP deal gave about
1% of the growth. We believe by 2H, demand could worsen more than
what companies are prepared for. For smaller players such as MindTree
with already low EBIT margins (9.1%), pricing pressure and lower fresh
graduate intake could significantly impact profits as could a USD/INR
reversal. We retain REDUCE until these risks are reflected in the price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Solid 2Q, but risks remain
RESULTS REVIEW
Pricing gains help revenue beat, hedges help bottom line
MindTree reported a stronger-than-expected 2QFY12 with USD revenue
up 9.5% q-q (BNPP: 5.6%) largely on higher pricing (+3.1% q-q). But the
EBITDA came in only 1.5% ahead of our view as higher wage costs, onsite
revenue shift and SG&A expenses took away some of the revenue gains.
The big 48% EPS beat was driven by hedging and non-operational gains.
SUMMARY
Signs that back-to-basics strategy is paying off
IT services (10.1% q-q) led the growth, while product engineering services
(PES, 36% of revenue) grew 8.5% after several slow quarters. On the face
of it, it appears the focus on core accounts (active clients declined 13 q-q)
is paying off. However, management indicated a likely seasonally muted
3Q and slowing growth from consumer and semiconductor PES clients.
VALUATION
Reasons to believe some of the gains are not sustainable
Despite the positives – 1,000+ net hires, pricing gains, likely further
margin gains on operational efficiencies, falling attrition (21.7% vs 25.6%
in 1Q) – we believe the high 2Q growth is not sustainable. Over half of the
incremental revenue came from the top 2-5 client bracket (up 28.5% q-q)
and from Europe (up 23.7% q-q). Moreover, one large IP deal gave about
1% of the growth. We believe by 2H, demand could worsen more than
what companies are prepared for. For smaller players such as MindTree
with already low EBIT margins (9.1%), pricing pressure and lower fresh
graduate intake could significantly impact profits as could a USD/INR
reversal. We retain REDUCE until these risks are reflected in the price.
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