Mindtree Limited - REDUCE -Droid bites A strong 2QFY11 :: IIFL

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Droid bites
A strong 2QFY11 was overshadowed by a costly exit from its Android
handset development business. After having spent ~US$4.5m on it,
Mindtree is ‘converting’ its Mindtree Wireless subsidiary to a services
business. However, the exit is costing Mindtree another US$12m-
14m (more than its initial estimate on the total cost of handset
development itself). On the other hand, while growth in its services
business has picked up, we continue to remain worried over margins
for mid-cap IT vendors. During 2QFY11, attrition increased to ~35%
at Mindtree and could lead to further cost escalation. We retain
REDUCE.
Robust growth in IT services: On the back of a strong growth in app.
maintenance and testing services, revenue growth was robust at ~7%
QoQ US$. BFSI and manufacturing continued to lead growth at 12% and
10.2% QoQ revenue growth, respectively. EBITDA margins, despite the
salary hikes and further losses in its Mindtree Wireless subsidiary fell only
100bps QoQ.
Exit from IP licensing and Android handsets: Earlier plans of selling
white-labeled Android mobile handsets have been shelved. While we
have been reiterating that with little differentiation, Mindtree’s chances of
success were slim, the high working-capital requirements have increased
risks to its Android foray. However, due to prior commitments with its
suppliers, asset write-offs and layoff costs, management indicated that
exit costs are likely to be rather large at US$12m-14m.
Further cost escalation: Despite salary hikes in 1QFY11, attrition (qaa)
has increased to ~36% in 3QFY11. While management indicated that has
already started showing signs of decline, the high attrition makes it
difficult to contain costs and could result in further cost escalations. We
are revising down our FY11 EPS by ~30% and revising up our FY12/13
EPS by 7-12%.