MindTree - In Line With Expectations, Result Update Q2FY15 :: Edelweiss PDF report link

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Mindtree's Q2FY15 revenues at USD 147.1mn (sequential growth of 4.1%) were in line with our estimate. Growth during the quarter was purely driven by volume growth of 4.1% QoQ while blended realization remained flat QoQ. The management has maintained its positive outlook on both, IT services as well as Hi- Tech (PES) segments. EBITDA margins at 20.8% declined 23bps QoQ, led by wage hikes impacting margins negatively by 140bps. We expect Mindtree to deliver USD revenue growth of ~18% in FY15E. While we remain positive on Mindtree, the sharp run-up in the stock during the last 3 months makes it expensive at current valuations. We maintain our 'Hold' rating on the stock.

USD revenues in line led by healthy growth in Manufacturing and T&T

Mindtree's Q2FY15 revenue of USD 147.1mn (+4.1% QoQ), with a steady volume growth of 4% QoQ, was in line with our estimate. In INR terms, revenues increased 5% QoQ to INR 889 cr. On a blended basis, realizations remained flat QoQ. Vertical-wise, Manufacturing and Travel posted strong QoQ growth of 6% and 8.5%, respectively while Hi-Tech (or PES, 33% of revenues) also posted healthy growth of 4.1% QoQ. PAT came in at INR 137 cr, in line with our estimate, led by stable operating margins and forex gains of INR 10 cr during the quarter.

Extending client mining beyond Top 10 to Top 40 accounts underpins positive outlook

Mindtree has been gearing up for the future by making investments in sales efforts to take advantage of the improved demand scenario. It has a dedicated account management strategy for its 10 key accounts. The successful client mining of Top 10 clients has been instrumental in delivering steady growth (last 10 quarters CQGR – Top 10 clients: 4.1%, Non-Top 10 clients: 2.8%). The management has clearly stated its intention to replicate this strategy for its 10 to 40 clients too, which will drive the next leg of growth for the company. Mindtree expects demand in Hi-Tech (PES) to pick up largely in Cloud Computing, Semiconductor and Software Products space.

Utilisation improvement offsets wage hike pressures

Mindtree's EBITDA margin drop of 23bps QoQ to 19.8% was primarily due to wage hikes (-140bps impact on margins), which was offset by utilization improvement by 180bps QoQ. However, for the full fiscal year, Mindtree expects margins to remain stable at current levels despite wage hikes, as it has margin levers like higher SG&A spends at its disposal to resort to. Going forward, we expect margins to remain stable around 20%.

LINK

https://www.edelweiss.in/research/MindTree--In-Line-With-Expectations,-Result-Update-Q2FY15/10005063.html