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We met the management of MindTree to understand the growth opportunity from
new focus area and scope mean reversal for margins. The management cited no
reason for panic from the client’s IT spending. The company is keeping a strict vigil
on levers to improve margin. We reiterate ‘Accumulate’ rating.
IT Services steady, but PES to be a drag: According to the management, there is
no panic from their top 30 clients, as clients are more prepared than 2008.
Demand in PES (36% of revenue) is soft due to downward cycle in hi-tech
spending; however, IT Services demand is steady, with strong demand from
Manufacturing (Consumer) vertical. The clients have not indicated any decline in
IT budget and no pressure on pricing. The growth is likely to be led by top-10
clients. We expect the company to deliver 0-2% QoQ growth in Q3FY12.
Margin focus could spin surprise: The management is more focused on
improving margin profile along with steady growth momentum. MindTree is
likely to exit FY12, with operating margin of 14-15% (@Rs46/$) and likely to
attain 18% in FY13. The company is likely to focus more on mining existing
clients to improve revenue per client. Also, the company has only 34% of total
employees with less than three years of experience, compared to 45-50% for
larger peers. The company is hiring 3k fresher for FY13 to rationalize pyramid.
Other highlights: 1) New client acquisition in FY12 could ramp-up to top 10
clients 2) Slowdown in hi-tech spending a drag for PES 3) IT Services growth
stable (with demand in Data Analytics, Business Intelligence, Business
Warehousing, KPO) 4) Forex hedge (FY12: $72m @45.95, FY13: $75 @Rs45.3)
could restrict gain due to rupee depreciation 5) Some IP-led revenue in Q3FY12
Valuation and Recommendation: Renewed focus on core-business in the last
two quarters has pushed the performance of MindTree ahead of Tier-2 peers.
We expect the performance to be steady. However, hedge-book would restrict
the gain at the bottom-line. The near-term performance could be drag because
of non-operating losses. However, we see room for positive surprise in FY13. We
reiterate ‘Accumulate’, with target price of Rs470, 10x FY13e earnings estimate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met the management of MindTree to understand the growth opportunity from
new focus area and scope mean reversal for margins. The management cited no
reason for panic from the client’s IT spending. The company is keeping a strict vigil
on levers to improve margin. We reiterate ‘Accumulate’ rating.
IT Services steady, but PES to be a drag: According to the management, there is
no panic from their top 30 clients, as clients are more prepared than 2008.
Demand in PES (36% of revenue) is soft due to downward cycle in hi-tech
spending; however, IT Services demand is steady, with strong demand from
Manufacturing (Consumer) vertical. The clients have not indicated any decline in
IT budget and no pressure on pricing. The growth is likely to be led by top-10
clients. We expect the company to deliver 0-2% QoQ growth in Q3FY12.
Margin focus could spin surprise: The management is more focused on
improving margin profile along with steady growth momentum. MindTree is
likely to exit FY12, with operating margin of 14-15% (@Rs46/$) and likely to
attain 18% in FY13. The company is likely to focus more on mining existing
clients to improve revenue per client. Also, the company has only 34% of total
employees with less than three years of experience, compared to 45-50% for
larger peers. The company is hiring 3k fresher for FY13 to rationalize pyramid.
Other highlights: 1) New client acquisition in FY12 could ramp-up to top 10
clients 2) Slowdown in hi-tech spending a drag for PES 3) IT Services growth
stable (with demand in Data Analytics, Business Intelligence, Business
Warehousing, KPO) 4) Forex hedge (FY12: $72m @45.95, FY13: $75 @Rs45.3)
could restrict gain due to rupee depreciation 5) Some IP-led revenue in Q3FY12
Valuation and Recommendation: Renewed focus on core-business in the last
two quarters has pushed the performance of MindTree ahead of Tier-2 peers.
We expect the performance to be steady. However, hedge-book would restrict
the gain at the bottom-line. The near-term performance could be drag because
of non-operating losses. However, we see room for positive surprise in FY13. We
reiterate ‘Accumulate’, with target price of Rs470, 10x FY13e earnings estimate.
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