MindTree Retain positive view on inexpensive valuations:: Emkay

We met MindTree management recently. We present below the key
takeaways
n Strength in IT Svcs with good traction in Manufacturing and
BFSI. No untoward cancellations in PES recently with PES
expected to report seq growth in Sep’12 qtr
n Co maintains outlook of 11-14% rev growth for FY13 (4-6%
CQGR), however it remains hinged on closure of some large
deals. Street (including us) factoring in <11 growth="growth" p="p" rev="rev">n Company has hired ~250 freshers in Sep’12 qtr. Absorption of
fresher offers could get extended by 1-2 qtrs ( driven both by
lower than earlier est revenue growth/attrition coming down)
n Tweak FY13/14E EPS higher by 10/6% to Rs 76/81 on
currency resets. Roll over to FY15E EPS of ~Rs 88 leads raise
in TP to Rs 800(V/s Rs 730 earlier). BUY stays

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Strength in IT Services remains, PES also seeing some signs of pick up
Our discussions with MindTree mgmt indicate that the strength in the IT Svcs continues
(reported a 3% QoQ US$ rev growth in June’12 qtr and has driven growth through
FY11/12 recording a 31%/37% YoY US$ rev growth) with co continuing to see good
traction both in the Manufacturing and the BFSI space (note that MindTree derives ~8-
9% of overall rev from the Insurance segment). We highlight that Mind Tree’s strong
growth in IT Svcs is being aided by strong client mining with top 5/10 clients growing by
11/9% CQGR through the past 5 qtrs V/s 4% CQGR at the co wide level with
contribution from top 10 clients increasing by ~900 bps over the period). Co is not
seeing any untoward cancellations in PES segment recently and expects to report
a seq rev growth in the segment in Sep’12 qtr along with reporting flat rev in FY13.
FY13 outlook of 11-14% rev growth hinges on closure of some large deals
MindTree continues to maintain its FY13 rev growth outlook of 11-14% which entails a
‘relatively stiff’ 4-6% CQGR through Q2-Q4FY13 which in our view remains hinged on
closure of certain large engagements that MindTree is pursuing currently. In this context,
MindTree has made several senior hiring’s to bolster both large deal pursuit as well as
drive further traction with strategic client accounts( refer table below). We highlight that
street (including us) continue to build in <11 for="for" given="given" growth="growth" mindtree="mindtree" p="p" rev="rev" the="the" us="us">tough arithmetic. Management also indicated that it has hired ~250 freshers in Sep’12 qtr
and expects the joining of ~3,000 freshers could be pushed to Q1/Q2FY14 given both
‘lower than budgeted’ volume growth/ employee turnover.
Tweak FY13/14E EPS higher by 10/6% on currency resets, BUY stays
We tweak our FY13/14E earnings higher by 10/6% to ~Rs 76/81 (V/s Rs 70/76 earlier)
driven by currency resets (Rs 55/$ and Rs 52/$ for FY13/14 V/s Rs 52/$ and Rs 51/$
earlier). We also introduce FY15E earnings at ~Rs 88 and roll over TP to FY15 drive a
raise in TP to Rs 800. Valuations at ~9x/8.5x FY13/14E P/E remain inexpensive in the
context of continuous operational performance, albeit do not rule out some near term
pause given a 50%/90% uptick in stock price in the past 6M/12M.