Soft by its own standards… • MindTree :: ICICI Securities

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Soft by its own standards…
• MindTree reported its Q3FY15 earnings that were generally soft by
its own standards. US$ revenues grew 0.4% QoQ to $147.7 million
(1.2%, $148.8 million estimate) led by BFSI, manufacturing & retail
• Revenues in rupees grew 2.6% QoQ to | 911.7 crore, also below our
4.2% QoQ growth and | 925.7 crore estimate
• At 20.5%, EBITDA margins were above our 20% estimate led by
operational efficiency despite wage and cross-currency headwinds
• Reported PAT of | 140.8 crore was higher than our | 131.9 crore
estimate led by EBITDA margin beat and higher other income
Lowering FY15E estimates but raising FY16E to account for acquisition…
Though MindTree (MTL) guided for a better Q4 – relative to Q3 in
constant currency – and that FY15E would be significantly better than
Nasscom’s 13-15% growth guidance, it seems customary. The rationale is
that even a flat sequential Q4 yields 16.4% YoY growth in FY15E given a
strong start to the year (6.4%, 4.1% QoQ growth in Q1 and Q2) and
healthy order bookings. MTL signed deals worth $152 million (renewal
$106 million and $46 million new scope) in Q3 taking the total signings in
excess of ~$600 million on an LTM basis. We are adjusting our FY15E
dollar revenue growth estimates to 17.2% vs. 18.5% earlier. That said, we
are raising our FY16E growth assumption to 18% ($694 million) vs. 16%
($689 million) to account for Discoverture acquisition contribution.
Margin surprises positively led by operational efficiency…
Q3 EBITDA margins improved 70 bps QoQ to 20.5% and were ahead of
our 25 bps and 20% estimate as tailwinds from rupee and operational
efficiency such as rate realisation, increase in fixed price contracts and
cost management could offset headwinds from cross-currency and wage
hikes. MTL’s margin profile continues to be higher than its FY09-14
average of 15.9% and represents an improvement of 460 bps – led by
operational efficiency, pricing improvement and growth. Assuming
flattish margins in Q4FY15E – in line with guidance – yields FY15E margin
of 20.2%. Consequently, we maintain our 20.1% margin assumption.
Top client continues to lead quarterly growth…
Quarterly growth continues to be driven by top client. The top customer
grew a robust 6% QoQ, though coming off from a strong base (8.8% and
12.9% QoQ growth in Q2, Q1, respectively). Top 5 customer growth
helped (0.8%) but has moderated given healthy Q2 (4.4%) and Q1 (3.8).
Top 10 revenues were soft and declined 1% QoQ. Client addition and
transition continues to impress. MTL added five new clients. The $1
million clients grew by six to 83 while the company added one customer
to $50 million+ category. Revenue per active client was flat QoQ at
$734.8k vs. $735k in Q2 and eight quarter average (during the same
period active client base had declined by 31 to 201) of $623.6k primarily
led by top client mining and rationalisation of tail accounts.
Valuations continue to be lofty; downgrade to SELL from HOLD…
We estimate MTL will report revenue, earnings CAGR of 17%, 19% in
FY14-16E (average 20.2% EBITDA margins in FY15-16E), vs. 20%, 54%
reported during FY09-14 (average 15.9%), respectively, given IT services
refocus and acceleration in hi-tech vertical. Though we raise our
estimates, target multiple (15x vs. 13.5x earlier) and price (| 1150 vs.
| 1000) to account for revenue size, bookings and margin profile, we
downgrade the stock to SELL given limited comfort on valuations.

LINK

http://content.icicidirect.com/mailimages/IDirect_MindTree_Q3FY15.pdf