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Mindtree (MTCL)
Technology
Decent quarter – margin beat makes up for modest revenue miss. MindTree’s
modest miss on 3QFY12 revenues versus ours and Street estimates should be viewed in
the context of December quarter seasonality and low expectations being discounted in
the stock price. Margin performance was slightly ahead of expectations and lower forex
losses aided net income beat. We cut our revenue estimates but EPS estimate for
FY2013E goes up on the back of revised Re assumption. Stock appears inexpensive at
8.4X FY2013E EPS. We maintain ADD with a revised TP of Rs540/share (Rs500 earlier).
3QFY12 – decent quarter…
MindTree reported a decent quarter with qoq US$ revenue growth of 2.3% to US$103.7 mn,
marginally below our estimate. EBITDA margin expanded 440 bps qoq to 17.3% (410 bps
expansion on account of currency, the balance operational efficiencies), ahead of our estimate of a
400 bps expansion. Net income of Rs606 mn (+12% qoq, +99% yoy) beat our estimate by 7%,
aided by lower-than-expected forex losses. Revenue growth was led by IT services (ITS) business
(+6.6% qoq) even as product engineering services (PES) revenues declined 5.4% qoq.
…but not without wrinkles
Growth in ITS revenues was led by large transition revenues booked on an ERP contract being
executed for a large European account. Our estimate of these transition revenues suggests that
these accounted for nearly 2/3rd of incremental revenues qoq. We do note that even excluding
these revenues, ITS business would have grown a healthy 4.2% qoq in US$ terms. ITS business
has grown at a healthy 9% CQGR over the past six quarters.
PES business continues to remain challenged. MT reported 5.4% qoq decline in PES revenues
and indicated challenging times ahead for this business on account of (1) increased customer
caution in semiconductor and consumer electronics segments, and (2) MT’s decision to move
out of sub-scale (for MT) industrial automation and core automotive segments. The silver lining
– PES contribution has now come down to 33.1% of total revenues and weak outlook on this
business is that much lower drag now.
Margin expansion ex-currency was subdued. As noted earlier, 410 bps of the 440 bps qoq
EBITDA margin expansion was led by Re depreciation. Ex-Re margin expansion was a modest 30
bps and may raise questions on the management’s confidence on taking ex-currency (i.e. Re at
45-46) margins up towards the 14-15% mark (this was 13.2% in 3Q). We do note that strong
hiring in a seasonally weak volumes quarter impacted utilization and hence, margins.
We retain our positive stance – buy into a sustainable growth story even though
it would be volatile on a quarterly basis
MindTree has all the building blocks for growth and scale though it lost its way through
unnecessary diversification. We believe that renewed focus on core business, recent large
deal wins, and investments in the front-end should aid MT sustain a strong growth rate in
the ITS segment even as PES segment faces headwinds. We forecast revenue growth of
14.1% in FY2013E.
We raise our EPS estimate by 5.3% for FY2013E to Rs53.9. We maintain our ADD rating
with a revised TP of Rs540 (Rs500 earlier) valuing the company at 10X FY2013E earnings.
We note that we have built in ample cushion on margins (we forecast 15.1% EBITDA
margin in FY2013E on Re/US$ assumption of 51.5 – the company reported 17.3% in
3QFY12 with Re realization at 50.15).
Other results and conference call highlights
MT expects a muted 4QFY12 as well with sequential growth rate similar to 3QFY12.
Net headcount addition for the quarter was 354. Also, quarterly annualized attrition
dropped further to 18.3% from 18.9% in 2QFY12.
The amount of outstanding hedges at end-Dec 2011 was US$160 mn, of which US$44
mn was for 4QFY12 at an average rate of Rs46.3 per Dollar. The balance US$116 mn for
FY2013 (up from US$75 mn at end-Sep 2011) is at an average exchange rate of 47.7.
FY2013 hedges comprise US$28 mn of leveraged options which are marked to market
and US$88 mn at an average rate of 49.4.
Losses in OCI carried forward, was to the extent of US$11 mn.
MT has made 3,000 campus offers for FY2013E fresher batch.
DSO went up 2 days qoq to 72 days.
Management commentary was mixed, not unlike its larger peers who have reported
3QFY12 earnings in the past one week. MT management indicated cautionary delays in
decision-making, especially in the BFS segment, even as budget finalization has happened
on time and clients appear comfortable with spending the budgets. As discussed earlier,
segments of PES business continue to remain challenged.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mindtree (MTCL)
Technology
Decent quarter – margin beat makes up for modest revenue miss. MindTree’s
modest miss on 3QFY12 revenues versus ours and Street estimates should be viewed in
the context of December quarter seasonality and low expectations being discounted in
the stock price. Margin performance was slightly ahead of expectations and lower forex
losses aided net income beat. We cut our revenue estimates but EPS estimate for
FY2013E goes up on the back of revised Re assumption. Stock appears inexpensive at
8.4X FY2013E EPS. We maintain ADD with a revised TP of Rs540/share (Rs500 earlier).
3QFY12 – decent quarter…
MindTree reported a decent quarter with qoq US$ revenue growth of 2.3% to US$103.7 mn,
marginally below our estimate. EBITDA margin expanded 440 bps qoq to 17.3% (410 bps
expansion on account of currency, the balance operational efficiencies), ahead of our estimate of a
400 bps expansion. Net income of Rs606 mn (+12% qoq, +99% yoy) beat our estimate by 7%,
aided by lower-than-expected forex losses. Revenue growth was led by IT services (ITS) business
(+6.6% qoq) even as product engineering services (PES) revenues declined 5.4% qoq.
…but not without wrinkles
Growth in ITS revenues was led by large transition revenues booked on an ERP contract being
executed for a large European account. Our estimate of these transition revenues suggests that
these accounted for nearly 2/3rd of incremental revenues qoq. We do note that even excluding
these revenues, ITS business would have grown a healthy 4.2% qoq in US$ terms. ITS business
has grown at a healthy 9% CQGR over the past six quarters.
PES business continues to remain challenged. MT reported 5.4% qoq decline in PES revenues
and indicated challenging times ahead for this business on account of (1) increased customer
caution in semiconductor and consumer electronics segments, and (2) MT’s decision to move
out of sub-scale (for MT) industrial automation and core automotive segments. The silver lining
– PES contribution has now come down to 33.1% of total revenues and weak outlook on this
business is that much lower drag now.
Margin expansion ex-currency was subdued. As noted earlier, 410 bps of the 440 bps qoq
EBITDA margin expansion was led by Re depreciation. Ex-Re margin expansion was a modest 30
bps and may raise questions on the management’s confidence on taking ex-currency (i.e. Re at
45-46) margins up towards the 14-15% mark (this was 13.2% in 3Q). We do note that strong
hiring in a seasonally weak volumes quarter impacted utilization and hence, margins.
We retain our positive stance – buy into a sustainable growth story even though
it would be volatile on a quarterly basis
MindTree has all the building blocks for growth and scale though it lost its way through
unnecessary diversification. We believe that renewed focus on core business, recent large
deal wins, and investments in the front-end should aid MT sustain a strong growth rate in
the ITS segment even as PES segment faces headwinds. We forecast revenue growth of
14.1% in FY2013E.
We raise our EPS estimate by 5.3% for FY2013E to Rs53.9. We maintain our ADD rating
with a revised TP of Rs540 (Rs500 earlier) valuing the company at 10X FY2013E earnings.
We note that we have built in ample cushion on margins (we forecast 15.1% EBITDA
margin in FY2013E on Re/US$ assumption of 51.5 – the company reported 17.3% in
3QFY12 with Re realization at 50.15).
Other results and conference call highlights
MT expects a muted 4QFY12 as well with sequential growth rate similar to 3QFY12.
Net headcount addition for the quarter was 354. Also, quarterly annualized attrition
dropped further to 18.3% from 18.9% in 2QFY12.
The amount of outstanding hedges at end-Dec 2011 was US$160 mn, of which US$44
mn was for 4QFY12 at an average rate of Rs46.3 per Dollar. The balance US$116 mn for
FY2013 (up from US$75 mn at end-Sep 2011) is at an average exchange rate of 47.7.
FY2013 hedges comprise US$28 mn of leveraged options which are marked to market
and US$88 mn at an average rate of 49.4.
Losses in OCI carried forward, was to the extent of US$11 mn.
MT has made 3,000 campus offers for FY2013E fresher batch.
DSO went up 2 days qoq to 72 days.
Management commentary was mixed, not unlike its larger peers who have reported
3QFY12 earnings in the past one week. MT management indicated cautionary delays in
decision-making, especially in the BFS segment, even as budget finalization has happened
on time and clients appear comfortable with spending the budgets. As discussed earlier,
segments of PES business continue to remain challenged.
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