MindTree (MINT.BO)
Strong Quarter; Decent Outlook
Top mid-cap IT pick; Raise TP to Rs. 1,100 — Mindtree remains our top mid-cap
sector pick given (a) Good revenue growth trajectory (+4% qoq in Q1) – expect 13%
yoy growth in FY14; (b) Big beneficiary of INR depreciation – management confident of
flattish margins at constant currency in Q2 despite wage hikes, and currency benefits
will flow (+40-50bps per 1% depreciation in INR); (c) Valuations of ~9x FY14E.
Good start to FY14 — Mindtree delivered ~4% qoq growth (Citi exp: 3% qoq) with
EBITDA margins of 18.4% (down 60 bps qoq, Citi exp: 18.1%). Net profit at Rs. 1.35b
(Citi exp: Rs. 1.15b) also benefitted from high forex gains. Growth was led by IT
Services - BFSI and manufacturing/retail verticals and US geography. PES revenues
increased marginally by ~1% qoq. Mindtree signed deals of ~$95mn in the quarter.
Outlook for Q2 — Management expects good growth to continue into Q2 with margins
remaining stable at constant currency. The negatives of wage hike and significant
campus hiring will be offset by growth and lower visa costs qoq. Part of the INR
benefits will likely flow through as margin gains – although they could partly be offset by
forex losses (~$5m if INR remains at current levels, as per the management).
Other key takeaways — (a) Hiring was strong with addition of ~700 employees qoq.
(b) Attrition on a LTM basis was 12.4%, lowest level in the past 3 years. (c) DSOs
increased to 77 days from 70 in Q4 – management suggested that it was a slippage on
collections and there was no concern on quality of receivables. (d) PES (~30% of rev)
now reorganized as a separate 'Hi-Tech' vertical to enable cross-selling of services.
Raise earnings by ~14%; trim multiple marginally — We raise earnings by ~14% for
FY14E/FY15E on account of (a) Significant beat in 1Q – on revenues/margins/forex;
(b) Good revenue momentum and hiring; (c) INR benefits flowing through into margins.
However, we trim our multiple from 11x to 10.5x (~30% discount to HCLT’s target
multiple) given high sensitivity to currency, which remains volatile.
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Strong Quarter; Decent Outlook
Top mid-cap IT pick; Raise TP to Rs. 1,100 — Mindtree remains our top mid-cap
sector pick given (a) Good revenue growth trajectory (+4% qoq in Q1) – expect 13%
yoy growth in FY14; (b) Big beneficiary of INR depreciation – management confident of
flattish margins at constant currency in Q2 despite wage hikes, and currency benefits
will flow (+40-50bps per 1% depreciation in INR); (c) Valuations of ~9x FY14E.
Good start to FY14 — Mindtree delivered ~4% qoq growth (Citi exp: 3% qoq) with
EBITDA margins of 18.4% (down 60 bps qoq, Citi exp: 18.1%). Net profit at Rs. 1.35b
(Citi exp: Rs. 1.15b) also benefitted from high forex gains. Growth was led by IT
Services - BFSI and manufacturing/retail verticals and US geography. PES revenues
increased marginally by ~1% qoq. Mindtree signed deals of ~$95mn in the quarter.
Outlook for Q2 — Management expects good growth to continue into Q2 with margins
remaining stable at constant currency. The negatives of wage hike and significant
campus hiring will be offset by growth and lower visa costs qoq. Part of the INR
benefits will likely flow through as margin gains – although they could partly be offset by
forex losses (~$5m if INR remains at current levels, as per the management).
Other key takeaways — (a) Hiring was strong with addition of ~700 employees qoq.
(b) Attrition on a LTM basis was 12.4%, lowest level in the past 3 years. (c) DSOs
increased to 77 days from 70 in Q4 – management suggested that it was a slippage on
collections and there was no concern on quality of receivables. (d) PES (~30% of rev)
now reorganized as a separate 'Hi-Tech' vertical to enable cross-selling of services.
Raise earnings by ~14%; trim multiple marginally — We raise earnings by ~14% for
FY14E/FY15E on account of (a) Significant beat in 1Q – on revenues/margins/forex;
(b) Good revenue momentum and hiring; (c) INR benefits flowing through into margins.
However, we trim our multiple from 11x to 10.5x (~30% discount to HCLT’s target
multiple) given high sensitivity to currency, which remains volatile.
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