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http://content.icicidirect.com/mailimages/ICICIdirect_MindTree_InitiatingCoverage.pdf
B a c k t o b a s i c s …
MindTree Ltd (MTL) primarily earns revenues from product engineering
(PES) & IT services & provides IT services to customers across
manufacturing, banking financial services & insurance (BSFI) and travel &
transportation verticals. MTL predominantly provides application
development & maintenance and testing & infrastructure management
services. Renewed management focus on growing IT services revenues &
operating margin expansion could abate investor concerns, accelerated
by events such as handset foray & exit of founder chairman. We expect
revenues/net profit to grow at 20.2%/3.7% CAGR during FY10-FY13E
period coupled with a 122 bps expansion in EBITDA margins to 16% in
FY13E. Though valuations appear reasonable, higher contribution of
discretionary services portfolio remains a concern. Noticeably, R&D
outsourcing services are late cyclical & generally lag IT services in
recovery. Consequently, we initiate MindTree with HOLD rating.
Focus back on revenue growth led by large deals wins
Subsequent to the unsuccessful handset foray & the exit of founder
chairman, MTL identified select service lines & verticals to drive revenue
growth, exiting a few in the process. Signing of $70 million worth of deals
in the infrastructure management services space manifests management
focus & could help improve revenue visibility.
EBITDA margin could improve 122 bps YoY in FY13E
EBITDA margins declined 717 bps to 11.8% in FY11 primarily led by the
unsuccessful product foray. However, for 9MFY12, the average EBITDA
margins were 13.8%, an increase of 178 bps over 9MFY11 led in part by
rationalisation of employee costs (21.8% YoY growth vs. 24.3% YoY in
revenues) & admin expenses (20.2% YoY growth). We expect the EBITDA
margin to decline 38 bps QoQ in Q4FY12E to 16.9% & rise 122 bps YoY in
FY13E to 16%.
Valuations
The underperformance of the stock in CY11 can largely be attributed to
strategic missteps, which stand rectified. At current levels, MTL is trading
at 9.8x and 8.3x our FY12E and FY13E diluted EPS estimate of |49.9 and
|58.8, respectively. From a Mcap/sales and EV/EBITDA perspective, it is
trading at 1x & 6x on FY12E; 0.9x & 4.7x on FY13E basis, respectively. We
expect revenues/net profit to grow at 20.2%/3.7% CAGR during FY10-
FY13E period coupled with EBITDA margin expansion (122 bps in FY13E).
We initiate coverage on MTL with a target price of | 511.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_MindTree_InitiatingCoverage.pdf
B a c k t o b a s i c s …
MindTree Ltd (MTL) primarily earns revenues from product engineering
(PES) & IT services & provides IT services to customers across
manufacturing, banking financial services & insurance (BSFI) and travel &
transportation verticals. MTL predominantly provides application
development & maintenance and testing & infrastructure management
services. Renewed management focus on growing IT services revenues &
operating margin expansion could abate investor concerns, accelerated
by events such as handset foray & exit of founder chairman. We expect
revenues/net profit to grow at 20.2%/3.7% CAGR during FY10-FY13E
period coupled with a 122 bps expansion in EBITDA margins to 16% in
FY13E. Though valuations appear reasonable, higher contribution of
discretionary services portfolio remains a concern. Noticeably, R&D
outsourcing services are late cyclical & generally lag IT services in
recovery. Consequently, we initiate MindTree with HOLD rating.
Focus back on revenue growth led by large deals wins
Subsequent to the unsuccessful handset foray & the exit of founder
chairman, MTL identified select service lines & verticals to drive revenue
growth, exiting a few in the process. Signing of $70 million worth of deals
in the infrastructure management services space manifests management
focus & could help improve revenue visibility.
EBITDA margin could improve 122 bps YoY in FY13E
EBITDA margins declined 717 bps to 11.8% in FY11 primarily led by the
unsuccessful product foray. However, for 9MFY12, the average EBITDA
margins were 13.8%, an increase of 178 bps over 9MFY11 led in part by
rationalisation of employee costs (21.8% YoY growth vs. 24.3% YoY in
revenues) & admin expenses (20.2% YoY growth). We expect the EBITDA
margin to decline 38 bps QoQ in Q4FY12E to 16.9% & rise 122 bps YoY in
FY13E to 16%.
Valuations
The underperformance of the stock in CY11 can largely be attributed to
strategic missteps, which stand rectified. At current levels, MTL is trading
at 9.8x and 8.3x our FY12E and FY13E diluted EPS estimate of |49.9 and
|58.8, respectively. From a Mcap/sales and EV/EBITDA perspective, it is
trading at 1x & 6x on FY12E; 0.9x & 4.7x on FY13E basis, respectively. We
expect revenues/net profit to grow at 20.2%/3.7% CAGR during FY10-
FY13E period coupled with EBITDA margin expansion (122 bps in FY13E).
We initiate coverage on MTL with a target price of | 511.
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