Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree
Road to recovery
Initiating coverage with Outperform rating and Rs450 TP
We initiate coverage of MindTree Limited with an Outperform rating and a
target price of Rs450, implying 27% upside. Our OP rating is driven by a
conviction in the company‟s growth potential and revenue, and EPS CAGR
growth of 19% and 40% during FY11-13E. For our detailed sector report, see
India IT Services – Mid-cap mantra for growth.
IT Services stable; margin recovery ahead
NASSCOM estimates that Indian IT sector revenues would grow 16%-18% in
CY11. MindTree provides services in the domains of IT Services and Product
Engineering Services (PES). We believe MindTree‟s IT services business will
show stable growth and grow faster than PES. The key parameter to keep in
mind for MindTree‟s recovery is margin expansion, which could lead to a rerating of the stock in coming quarters.
Core IT Services business contributes 58% of revenues and showed growth
of 31% in FY11. The company is focused on achieving higher than industry
average growth in this segment.
MindTree EBITDA margins declined by ~700bps in FY11, due to losses on
account of write-offs on smartphone business in comparison to FY10. But we
expect margins to improve from current levels by 100bps and 190bps in
FY12-13, respectively, on higher utilization levels and better management of
the pyramid structure.
Exited Smartphone business; charge booked in FY11
In April 2010, the company surprised the investor community by announcing
its intention to enter into production of white labelled 3G smartphones. This
was not taken positively by the market and finally in October 2010 the
company announced its decision to roll back on the Smartphone business and
convert the wireless segment into a pure services model. This decision cost
the company a one-time restructuring charge of ~US$3.2m in FY11 on
account of resource costs, purchase order cancellations and the write-off of
product prototypes.
Large deal wins, focus on profitability: Triggers for FY12
We believe the worst is behind MindTree from the losses from smart phone
business. We would look for large deals announcements, pricing improvement
and increases in margins as positive triggers for the stock. In our view,
MindTree has a management team with a strong pedigree that is well placed
to bring the company back on track for growth.
Valuation
We expect MindTree to deliver 2-year EPS CAGR of 40% over FY11–13E. At
10x FY3/12E PER, the stock provides an attractive entry point, in our view. In
our view, the market has punished the stock enough for its business decision
to venture into production of smart phone business. We expect to see a return
to valuations demanding of such a pedigreed company, once the market
factors in the strength of its core IT business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MindTree
Road to recovery
Initiating coverage with Outperform rating and Rs450 TP
We initiate coverage of MindTree Limited with an Outperform rating and a
target price of Rs450, implying 27% upside. Our OP rating is driven by a
conviction in the company‟s growth potential and revenue, and EPS CAGR
growth of 19% and 40% during FY11-13E. For our detailed sector report, see
India IT Services – Mid-cap mantra for growth.
IT Services stable; margin recovery ahead
NASSCOM estimates that Indian IT sector revenues would grow 16%-18% in
CY11. MindTree provides services in the domains of IT Services and Product
Engineering Services (PES). We believe MindTree‟s IT services business will
show stable growth and grow faster than PES. The key parameter to keep in
mind for MindTree‟s recovery is margin expansion, which could lead to a rerating of the stock in coming quarters.
Core IT Services business contributes 58% of revenues and showed growth
of 31% in FY11. The company is focused on achieving higher than industry
average growth in this segment.
MindTree EBITDA margins declined by ~700bps in FY11, due to losses on
account of write-offs on smartphone business in comparison to FY10. But we
expect margins to improve from current levels by 100bps and 190bps in
FY12-13, respectively, on higher utilization levels and better management of
the pyramid structure.
Exited Smartphone business; charge booked in FY11
In April 2010, the company surprised the investor community by announcing
its intention to enter into production of white labelled 3G smartphones. This
was not taken positively by the market and finally in October 2010 the
company announced its decision to roll back on the Smartphone business and
convert the wireless segment into a pure services model. This decision cost
the company a one-time restructuring charge of ~US$3.2m in FY11 on
account of resource costs, purchase order cancellations and the write-off of
product prototypes.
Large deal wins, focus on profitability: Triggers for FY12
We believe the worst is behind MindTree from the losses from smart phone
business. We would look for large deals announcements, pricing improvement
and increases in margins as positive triggers for the stock. In our view,
MindTree has a management team with a strong pedigree that is well placed
to bring the company back on track for growth.
Valuation
We expect MindTree to deliver 2-year EPS CAGR of 40% over FY11–13E. At
10x FY3/12E PER, the stock provides an attractive entry point, in our view. In
our view, the market has punished the stock enough for its business decision
to venture into production of smart phone business. We expect to see a return
to valuations demanding of such a pedigreed company, once the market
factors in the strength of its core IT business.
No comments:
Post a Comment