Rich valuations override healthy fundamentals… • MindTree - Hold :: ICICI Securities

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Rich valuations override healthy fundamentals…
• MindTree reported stable Q2FY15 earnings. US$ revenues grew
4.1% QoQ to $147 million, below our 5% QoQ growth and $148.4
million estimate, led by growth in retail, travel and digital services
• Revenues in rupees grew 5.3% QoQ to | 888.6 crore, also below our
6.6% QoQ growth and | 898.9 crore estimate
• At 19.8%, EBITDA margins were in line with our 19.8% estimate as
headwinds from wage hikes were partially offset by revenue growth
and utilisation improvement.
• Reported PAT of | 137.4 crore was marginally higher than our
| 136.4 crore estimate led by higher other income
Revenue growth may top 18% assuming 2.5% CQGR in H2FY15E…
Though MindTree does not guide, management commentary was
relatively upbeat and it expects FY15E revenues to grow ahead its FY14
and Nasscom’s 13-15% growth guidance led by robust deal signings and
conversion. With 6.4%, 4.1% growth in Q1 and Q2, MTL would still
achieve 16% YoY growth in FY15E, even if Q3 and Q4 revenues are flat,
sequentially and could top 18% assuming a modest 2.5% CQGR in H2.
Deal signings continue to be impressive as the company signed deals
worth $165 million (renewal $102 million and $63 million fresh) in Q2
taking the total signings in excess of ~$650 million on an LTM basis.
Finally, MTL’s strategy of selling "services" to hi-tech customers continues
to demonstrate success and could help achieve double digit growth for
the hi-tech business in FY15E and help accelerate growth.
Margin weakness offset by operational efficiency…
MTL’s Q2 EBITDA margins were flat sequentially at 19.8% - up 18 bps
decline QoQ - and were in line with our 19.8% estimate. MTL’s margin
profile continues to be higher than its FY09-14 average of 16.7% and
represents an increase of 310 bps – led by operational efficiency, pricing
improvement and revenue momentum. MTL expects Q3 margins could
be flat QoQ as 100 bps impact related to wage hikes for 15% of the staff
could be offset by operational efficiency. Overall, we expect FY15E
margins to be flat YoY as revenue growth, efficiency gains could help
offset investments headwinds.
Client matrices: top clients lead quarterly growth…
Client metric continues to be healthy as growth for the quarter was led by
top clients. Top, top 5 and top 10 customer revenues grew 8.8%, 4.4%
and 3.6% QoQ. Client addition and transition continues to impress. MTL
added eight new clients while $30 million clients grew by one to four; $20
million clients grew by one to seven and $5 million grew by one to 27.
Revenue per active client also improved to $735.2k vs. $685.9k in Q1 and
eight quarter average (during the same period active client base had
declined by 45 to 200) of $587.9k primarily led by improved mining of top
customers and rationalisation of tail accounts.
Lofty valuations dictate our HOLD rating
We estimate MTL will report revenue, earnings CAGR of 23%, 27% over
FY14-16E (average 20.2% EBITDA margins in FY15-16E), vs. 20%, 54%
reported during FY09-14 (average 15.9%), respectively, given IT services
refocus and anticipated acceleration in hi-tech vertical. We now value
MTL at | 1000 i.e. at 13.5x (12x earlier) its FY16E EPS of | 75. The higher
multiple is to account for healthy growth outlook and strong order
bookings.

LINK
http://content.icicidirect.com/mailimages/IDirect_MindTree_Q2FY15.pdf