Mindtree: On expected lines; on track for a strong FY2016E :: Kotak Securities

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On expected lines; on track for a strong FY2016E. Mindtree’s sequential constantcurrency
revenue growth of 2% was broadly in line with our estimate even as internals
disappointed us. A fast-growing digital practice that is facilitating entry into new
accounts, high-profile adds in CPG and focus on niche retailers and ISV segment will be
the bedrock of growth. Mindtree will also reap benefits of S&M spends and productivity
that will help in steadying out margins. We raise FY2015-17E earnings by 3-4% and TP
to `1,425 (`1,275 earlier). Use better entry points as current valuations are a tad
expensive. Retain ADD

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3QFY15 in line with our estimate; spike in attrition and revenue decline in Europe
Mindtree’s 3QFY15 revenue growth of 0.4% (2% in c/c) was in line with our estimate. Revenue
growth was led by the US market (+6% qoq). EBITDA margin increased 70 bps, largely on the
back of depreciation in the INR against the USD. Negatives for the quarter are—(1) Europe
business revenues declined again (partly impacted by currency) 6.9% qoq and 0.6% yoy to US$36
mn. S&M investments in Europe are yet to pay off after high attrition at the senior levels in the
past 15 months impacted growth and (2) spike in attrition rate to 21.6% on a quarterly
annualized basis from 19.7% in the previous quarter. Attrition has been inching up for some time.
We are disappointed that the company did not make adequate interventions to bring it under
control. Higher contribution of revenues from digital makes Mindtree more vulnerable than peers
on attrition. Net profit of `1.4 bn was 6% above our estimate and includes forex gain of `70 mn.
On track for a strong FY2016E with several segments that will drive growth
Mindtree’s solid positioning in the CPG space is helping it expand a number of services adopted
by existing accounts. The company has added more accounts in the recent quarter to its already
impressive list. Retail continues to be a crowded vertical but Mindtree is gradually establishing
itself with focus on smaller retailers; the company’s Oracle practice is a handicap in getting
application management deals. Travel & hospitality is another vertical where growth is healthy,
in the airlines and hotels space. Mindtree’s growth prospects remain strong in the independent
software vendors segment (ISV) of the hi-tech vertical. The company’s acquisition of Discoverture
will provide the much-needed impetus to insurance practice. Based on early indicators, we believe
Mindtree could exceed industry growth in FY2016E again; we model 15% growth.
Mindtree gets premium valuations for strong growth and confidence on sustainability of growth
We raise FY2015-17E revenue growth estimate by 0-1% and EPS by 3-4%. Admittedly,
valuations are not cheap and one can look for a better entry price. However, we highlight that
valuations are a function of growth and confidence on sustainability of growth—Mindtree
ranks high on both these parameters. We raise our target price to `1,425, valuing the stock at
17X Sep 2016E earnings. Maintain ADD rating

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily20012015ch.pdf