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MindTree (MINT.BO)
Management Expects Weak 4Q; A Better FY12
Call with management — We had a quick call with the management of MindTree
(Mr. Krishnakumar Natarajan, CEO & Mr. Sushanth Pai, Investor Relations).
Presented below are key points from that discussion.
4Q expected to be weak — Management sounded cautious on 4Q – expect
some decline in Kyocera services business, Next in Wireless (NiW). 3Q run rate
was ~$4m and is expected to drop to ~$1.5m, due to customer ramp down. Ex-
NiW, 4Q revenues should witness modest growth – in line with seasonal trends.
This ramp down will also impact margins – management expects flat margins
despite no one-offs this quarter (3Q had product related write-offs of ~$3m).
Management positive on FY12 — Despite a weak quarter, management sees
demand trends to be largely intact. IT Services should sustain the momentum in
FY12 as well. The Product Engineering Services (PES) segment (ex-NiW) is also
doing better now. On an overall basis, management expects to outgrow the
NASSCOM target of ~16-18% industry growth in FY12.
The recent restructuring — MindTree has recently rejigged its business to focus
on four verticals in IT Services – BFSI, Manufacturing (CPG & Automotive), Travel
& Transportation and Others. It has opted to move out of Energy & Utilities. PES
will consolidate R&D Services, Software Product Engineering and NiW.
Management believes that Testing, IMS and Analytics would be the future growth
drivers. Company recently announced two deals worth more than $70m over the
next five years to provide Infrastructure Management Services.
Maintain Sell; Some downside risk to estimates — We expect 4QFY11 to be
weak which could put some further downward pressure on our/consensus
estimates for FY12. We await FY11 results and will revise earnings post the same.
The stock is down 33% YTD – but no triggers in sight. Maintain Sell.
MindTree
Valuation
Our Rs440 target price of is derived from 10x Mar'12E EPS. This is in line with
mid cap IT Services multiples and factors management's decision to enter and
then exit the telecom products business within a short span of time. With the
Founder and Chairman deciding to move on from MindTree, this multiple also
excludes the Promoter premium that the stock used to enjoy.
Risks
We rate MindTree shares Medium Risk which is in line with other mid caps
under our coverage, despite our quant risk rating system suggesting Low Risk.
Upside risks to our target price are: (1) faster than expected recovery in the
US/global economy; (2) earlier/higher than expected pricing increases; (3) INR
depreciation; and (4) clarity around the wireless business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree (MINT.BO)
Management Expects Weak 4Q; A Better FY12
Call with management — We had a quick call with the management of MindTree
(Mr. Krishnakumar Natarajan, CEO & Mr. Sushanth Pai, Investor Relations).
Presented below are key points from that discussion.
4Q expected to be weak — Management sounded cautious on 4Q – expect
some decline in Kyocera services business, Next in Wireless (NiW). 3Q run rate
was ~$4m and is expected to drop to ~$1.5m, due to customer ramp down. Ex-
NiW, 4Q revenues should witness modest growth – in line with seasonal trends.
This ramp down will also impact margins – management expects flat margins
despite no one-offs this quarter (3Q had product related write-offs of ~$3m).
Management positive on FY12 — Despite a weak quarter, management sees
demand trends to be largely intact. IT Services should sustain the momentum in
FY12 as well. The Product Engineering Services (PES) segment (ex-NiW) is also
doing better now. On an overall basis, management expects to outgrow the
NASSCOM target of ~16-18% industry growth in FY12.
The recent restructuring — MindTree has recently rejigged its business to focus
on four verticals in IT Services – BFSI, Manufacturing (CPG & Automotive), Travel
& Transportation and Others. It has opted to move out of Energy & Utilities. PES
will consolidate R&D Services, Software Product Engineering and NiW.
Management believes that Testing, IMS and Analytics would be the future growth
drivers. Company recently announced two deals worth more than $70m over the
next five years to provide Infrastructure Management Services.
Maintain Sell; Some downside risk to estimates — We expect 4QFY11 to be
weak which could put some further downward pressure on our/consensus
estimates for FY12. We await FY11 results and will revise earnings post the same.
The stock is down 33% YTD – but no triggers in sight. Maintain Sell.
MindTree
Valuation
Our Rs440 target price of is derived from 10x Mar'12E EPS. This is in line with
mid cap IT Services multiples and factors management's decision to enter and
then exit the telecom products business within a short span of time. With the
Founder and Chairman deciding to move on from MindTree, this multiple also
excludes the Promoter premium that the stock used to enjoy.
Risks
We rate MindTree shares Medium Risk which is in line with other mid caps
under our coverage, despite our quant risk rating system suggesting Low Risk.
Upside risks to our target price are: (1) faster than expected recovery in the
US/global economy; (2) earlier/higher than expected pricing increases; (3) INR
depreciation; and (4) clarity around the wireless business.
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