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MindTree Limited
Robust Operating Performance
We believe MindTree will continue to deliver robust
operating performance over the coming quarters. The
stock is currently trading at 11xFY12e and 9xFY13e
EPS for earnings CAGR of 18% over FY12-14e.
Key Catalysts: We believe sustained improvement in the
operating performance over the coming quarters could be the
key catalyst for the stock. We expect MindTree to have
delivered industry-leading revenue growth of 22% in 1H with
operating margins improving to ~8% in F1H12 (vs. 7.7% in
F1H11). We expect MindTree to continue to show margin
improvement in F2H and achieve full-year margin of ~9.6%
(vs consensus estimate of ~9%).
Key Investor Debate: MindTree stock has corrected by 30%
YTD (vs -14% for the Sensex) on multiple concerns like the
exit of the co-promoter and the partial sale of his stake, losses
related to closure of its handset business and the ramp-down
by large client. Following the correction, the stock continues to
lag due to concerns of double dip in the US and a lack of
clarity on secular trends in margins for the company. We
believe uncertainty around pace of margin improvement has
restrained re-rating for the stock.
After an earnings decline of -53% yoy in FY11, we expect net
income to grow by 50% yoy in FY12e. We forecast strong
revenue and earnings CAGR of 17% and 18%, respectively,
over F2012-14. We believe our earnings estimates could turn
out to be conservative in the event of stronger-than-expected
revenue growth and continued rupee depreciation over the
coming quarters.
Risks to our Call: 1) Revenue growth in PE services (36% of
revenues) lags in the coming quarters dragging overall
revenue growth of the company, 2) Slowdown in key verticals
like manufacturing and BFSI in IT services owing to a tough
macro environment; and 3) Margin performance lags
expectations, leading to slower-than-expected improvement
over the coming quarters.
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