MindTree Solid quarter – raising EPS and TP :Macquarie Research,

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MindTree
Solid quarter – raising EPS and TP
Event
 MindTree’s 2Q results came in significantly ahead of our estimates. The
positive surprise in revenue growth and margins was supplemented by higher
forex gains in the quarter. We are raising our EPS and target price on the
stock to factor in the beat. MindTree remains our top mid-cap pick in the IT
space.
Impact
 Key highlight of 2Q: Growth momentum. This is the second consecutive
quarter when MindTree has delivered double-digit US$ revenue growth in its
IT Services segment (10% in 2Q vs. 11% in 1Q). This demonstrates
MindTree’s strong execution capability in the mid-cap space.
 Margin improvement driven by top-line growth. Solid revenue growth
helped the company report higher operating margins of 9.1% (+230bps QoQ)
vs. our estimate of a 40bps improvement.
 Forex gains explained. The forex gains of Rs171m can be explained in 4
parts: 1) Restatement of debtors at the ~Rs49 level (vs ~Rs45 in 1Q), 2)
hedges expiring at a rate of Rs47 during Jul-Aug in 2Q, 3) a gain from the
timing of a conversion of USD to INR during 2Q, and 4) an MTM provision on
hedges. The first three resulted in a US$7.2m forex gain partially offset by a
US$3.4m loss due to Point 4. We expect MTCL to report a minor hedging loss
in 3Q. The current hedge position is US$72m @ Rs46 for the rest of FY12.
 2Q results details - revenues cross US$100m mark. MindTree reported US$
revenues of US$101m (up 10% QoQ, 23% YoY), 5% above our estimate. In
INR, MTCL delivered revenues of Rs4,567m (up 11% QoQ and 19% YoY) and
PAT of Rs511m (up 48% QoQ and 120% YoY). Reported PAT includes a onetime
reversal write-back of a contingent liability of Rs37m. Adjusted 2Q EPS at
Rs12.6 would still be materially higher than Street estimate.
 The company announced an interim dividend of Rs2.50, which includes
a special dividend of Rs1 per share.
Earnings and target price revision
 We increase our earnings forecasts by 8% and 5% for FY12/13, respectively,
and raise our target price to Rs470 from Rs440. Details in Figure 4.
Price catalyst
 12-month price target: Rs470.00 based on a PER methodology.
 Catalyst: FY12 Client IT budget finalization.
Action and recommendation
 Reiterate Outperform. We believe the market does not appreciate the
margin expansion that the company can deliver following top-line momentum.
At 8x FY13E, the stock is extremely attractive, in our view.