Mindtree (3QFY15) : Running ahead of fundamentals. Downgrade to NEUTRAL :: HDFC Securities

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Mindtrees 3QFY15 results were a mixed bag. USD revenues were marginally below our expectations. However, EBIDTA margin beat led to PAT coming in 5% above our estimates. We model Mindtree?s USD revenues to grow by 17.4% in FY15 which would be the strongest organic growth amongst peers.

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Running ahead of fundamentals
Mindtree’s 3QFY15 results were a mixed bag. USD
revenues were marginally below our expectations.
However, EBIDTA margin beat led to PAT coming in
5% above our estimates.
We model Mindtree’s USD revenues to grow by
17.4% in FY15 which would be the strongest organic
growth amongst peers. Cross selling of
underpenetrated services and traction in Digital
Initiatives is aiding growth. Mindtree expects a
steady demand for FY16 driven by a ramp up in client
spends in SMAC Technologies as well as strong
traction in the top 30 accounts. Stock has
appreciated 45% over the past three months and
currently trades at rich valuations (16x FY17 EPS).
This is at a 5% premium to Infosys’ valuations. We
believe a volume decline of 1.5% witnessed during
the quarter and a modest revenue growth in 3QFY15
might not satiate the street’s high expectations.
While we continue to like Mindtree, we believe that
current price points appear unfavorable. We
downgrade our rating to NEUTRAL (Earlier BUY). Our
TP is upgraded by 20% to Rs 1,418/sh (16x FY17 EPS)
on the back of P/E multiple upgrade and rollover to
FY17.
 3QFY15 Highlights : Mindtree reported revenues of
US$ 147.7mn, up 0.4% QoQ and 2% in constant
currency, which is below estimates (US$ 148.6mn).
Total volumes declined by 1.5% QoQ (onsite volumes
up 1.8% QoQ, offshore volumes down 2.2% QoQ).
Blended pricing improved by 2.1% QoQ (onsite pricing
down 0.7% QoQ, offshore pricing up 2.4% QoQ).
EBIDTA margin of 20.5% was up 72bps QoQ and above
our estimates (19.8%). PAT came at Rs 1,409mn, 5%
above our estimates driven by the margin beat.
 VIew : We model USD revenue growth of 17.4/15.5%
for FY15/FY16E, one of the highest amongst peers.
Mindtree has been witnessing a steady effort mix shift
towards onsite driven by higher traction in front end
offerings. Headwinds from onsite shift in effort are
being negated by tailwinds from increased contribution
of fixed price projects (enabling operational
efficiencies). Hence, EBIDTA margins have remained
stable over the past few quarters. We model EBIDTA
margin at ~20.0-21% for FY15-FY17E. We retain our
EPS estimates as downgrade in USD revenues owing to
cross currency is negated by currency reset(USD vs.
INR) to lower levels. Rate NEUTRAL

LINK
 http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010813