MindTree -Hitting the milestones on road to recovery::Macquarie Research

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MindTree
Hitting the milestones on road to
recovery
Event
 Mindtree reported 1Q results that beat our street-high forecasts. The company
delivered 7.3% QoQ growth in US$ revenues on back of 6.2% volume growth
and price realization of 1.3%. 1Q EPS of Rs8.53 was ~25% higher than our
and 33% ahead of the street expectations. The company surprised positively
on all counts—revenue growth, margins and below the line items (tax and
treasury yield). Reiterate Outperform.
Impact
 On track to hit the 24% revenue growth in FY12. After two muted quarters
of revenue growth in 3Q and 4Q last fiscal (up 3.5% QoQ & 1.2% QoQ resp.)
investors were sceptical of the growth trajectory for the company, In our
initiation report Road to recovery, 21 June 2011 we had argued that worst for
the stock is behind us. We expected the growth traction to return in FY12,
helping the company to reap margin benefits. The company delivered on both
counts—US$ revenue up 7% QoQ and EBIT margins expanding 20bp QoQ.
 EBIT margins move up despite wage hikes. Mindtree had announced a
wage hike of 10-12% for its offshore employees and onsite wage hike of 2-4%
last quarter. The company had disclosed on its earnings call that the hike
would be administered in two batches – with 75% impact in 1Q FY12 and the
25% balance in 2Q FY12. We had anticipated this move to keep margins
under pressure, but the company surprised us positively.
 Product Engineering segment back in growth territory. The PES
revenues declined for the last two quarters as one of the key clients in the
segment was ramping down. With 1Q FY12, the company has returned back
to growth in this segment. IT services segment reported double-digit
sequential growth at 11% for this quarter.
 1Q Results. Mindtree reported US$ revenues of US$93m (up 7% QoQ, 20%
YoY), 1% ahead of our estimate. In rupee terms, the company delivered
revenues of Rs4,131m (up 6% QoQ and 19% YoY), EBITDA of Rs460m (up
4% QoQ and 4% YoY) and PAT of Rs345m (up 7% QoQ and 118% YoY). For
detailed summary of the results and deviation from our est, see Figure 1.
Earnings and target price revision
 We are raising our FY12/FY13 EPS by 2% / 1% to factor in the beat in 1Q
earnings. We retain our target price of Rs450.
Price catalyst
 12-month price target: Rs450.00 based on a PER methodology.
 Catalyst: Large deal wins
Action and recommendation
 OP maintained.