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Mindtree (MTCL)
Technology
Steady quarter; re-rating round the corner. MindTree delivered yet another steady
quarter; even as revenue growth was modest, solid margin expansion drove doubledigit qoq net income growth. The quarter was not a blowout by any means but a stock
trading at ~8X 12-month forward PE does not need one. We remain confident of the
company sustaining steady performance and expect re-rating to follow soon. We
increase our FY2013E EPS estimate to Rs59 and raise our TP to Rs590/share.
Conservative assumptions lend a lot of comfort to our estimates and ADD rating.
4QFY12 – steady quarter; beats lowered expectations
MindTree (MT) reported US$ revenue growth of 1.3% qoq, 0.9% ahead of our lowered
expectations. Net income of Rs689 mn, however, beat our estimate of Rs541 mn by a handsome
27% on the back of higher-than-expected EBITDA margins. MT reported a 140 bps qoq (and 750
bps yoy) expansion in EBITDA margins to 18.7% versus our estimated 16.9%. Revenue growth
was volume-led; non-recurrence of non-volume-linked milestone payments booked in 3QFY12
dragged reported pricing down. Product engineering business (32.8% of revenues for 4QFY12)
continued to remain a drag on growth even as IT Services revenue growth also moderated a bit.
Margin expansion was primarily led by improvement in employee pyramid – this remains a material
margin lever for the company.
We expect re-rating ahead
MT’s beaten-down PE multiple (8.2X FY2013E and 7.5X FY2014E EPS) continues to reflect the
overhang of the few mistakes (wireless handset investment, unnecessary diversification, free fall in
margins) the company made in FY2010 and FY2011. Bulk of stock’s returns (27% absolute and
38% relative to Sensex in the past one year) have come on the back of EPS upgrades even as the
PE multiple has remained stuck at around 7-9X (one-year forward) levels. The string of steady
quarters and more importantly, good improvement in underlying business metrics, has the stock
ripe for a re-rating, in our view. We value the stock at 10X our FY2013E EPS estimate of
Rs59/share – the conservative assumptions underlying our EPS forecast as well as the multiple
accorded lend comfort to our ADD rating.
Estimate revision – raise EPS estimate by 10% for FY2013E and 6% for FY2014E
We have raised our EPS estimate for FY2013E and FY2014E by 10% and 6% to Rs59 and Rs66,
respectively. Increase in margin assumptions is the key driver of the EPS upgrades even as we
moderate our revenue growth assumptions post cautious commentary from Infosys as well as MT.
We do note that our margin assumption of 16.5% for FY2013E compares well with 4QFY12
margins of 18.7%, thus building in ample conservatism.
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