MindTree - Inline Results, Result Update Q3FY15 :: Edelweiss

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Mindtree's Q3FY15 revenues at USD 147.7mn (sequential growth of 0.4%) were in line with our estimates. Growth during the quarter was driven by an increase in price realization, which saw an uptick of 2% on a blended basis. Volume de-grew by 1.5% owing to lower billing days/shut downs. Mindtree sees an increase in discretionary spending and improved order pipeline driving growth in Q4FY15 in both IT Services and Product Engineering Services (Hi-Tech). EBITDA margins at 20.5% improved QoQ by 72bps, primarily due to INR depreciation and stable utilisation. For FY16, the company expects growth to be driven by both, new opportunities (funnel has improved both in terms of value and volume) and from existing clients (initial discussions with clients on tech spend for FY16 have been positive). While we remain positive on Mindtree, we maintain our 'Hold' rating on the stock due to expensive valuations.

USD revenues in line, PAT higher due to higher forex gains

Mindtree's revenue of USD 147.7mn (+ 0.4% QoQ) was in line with our estimate. In INR terms, revenues increased 2.6% QoQ to INR 911crs. On a blended basis, realizations improved by ~2% QoQ. Vertical-wise, BFSI and Manufacturing posted strong QoQ growth of 3.5% and 3.2% each while HiTech remained flat (up 0.4% QoQ) mainly due to higher furloughs. PAT came in at INR 140crs, higher than our estimates, led by higher operating margins and forex gains of INR 7 cr during the quarter.

Extending client mining beyond Top 10 to Top 40 accounts underpins positive outlook

Mindtree has been gearing up for the future by making investments in sales efforts to take advantage of the improved demand scenario. It has a dedicated account management strategy for its 10 key accounts. The successful client mining of Top 10 clients has been instrumental in delivering steady growth (last 10 quarters CQGR – Top 10 clients: 4.1%, Non-Top 10 clients: 2.8%). The management has clearly stated its intention to replicate this strategy for its 10 to 40 clients too, which will drive the next leg of growth for the company. Mindtree expects demand in Hi-Tech (PES) to pick up largely in Cloud Computing, Semiconductor and Software Products space.

INR depreciation offsets wage hike pressures

Mindtree's EBITDA margin improved by 72bps QoQ to 20.5% was primarily due to higher forex gains despite wage hikes for 20% of employees. Utilisation excluding trainees remained stable at 74.2% QoQ. For the full year, Mindtree expects margins to remain stable at current levels despite wage hikes, as it has margin levers like higher SG&A spends at its disposal to resort to. Going forward, we expect margins to remain stable around 20%.

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https://www.edelweiss.in/research/MindTree--Inline-Results,-Result-Update-Q3FY15/10005455.html