Mindtree Ltd- Buy on dips to Rs 1183 - Rs 1223 for Target of Rs 1380 in 1 quarter ::HDFC Sec, report

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In our Q1FY15 Result Review dated July 23, 2014, we had recommended investors to buy Mindtree Ltd. (MTL) at the then CMP of Rs. 975.1 and add it on dips to Rs. 828- 864 for a price target of Rs. 1045 over the next quarter. Thereafter, the stock met our price target on July 28, 2014 and subsequently touched a new high of Rs. 1428.8 on Jan 20, 2015. Currently, it is quoting at Rs. 1297. MTL’s Q3FY15 results were above our estimates on all parameters (though the Q-o-Q USD revenue growth was marginally below the street estimates, it was better than our conservative projections). We present an update on the stock. Key highlights of Q3FY15 results: (Consolidated)  In USD terms, revenue stood at $147.7 mn, a growth of 0.5% Q-o-Q and 16.2% Y-o-Y. Sequential growth was impacted by decline in the overall volumes (down 1.5% Qo-Q; onsite volumes down 1.8% Q-o-Q & offshore volumes down 2.2% Q-o-Q). Furloughs impacted the volume growth. However, blended pricing improved by 2.1% Qo-Q, which was encouraging. Onsite pricing was down 0.7%, while offshore pricing was up 2.4%. In Constant currency (CC), revenues grew by 2% Q-o-Q. In INR terms revenues grew at a better rate by 2.6% Q-o-Q, aided by rupee depreciation during the quarter.  EBITDA grew by 20.9% Y-o-Y & 6.3% Q-o-Q. EBITDA margins improved by 94 bps Y-o-Y & 72 bps Q-o-Q respectively. Sequential improvement in margins was due to improvement in pricing driven by increasing contribution from fixed price projects. Rupee depreciation vs. USD also aided in margin expansion.  PAT grew by 58.6% Y-o-Y & 2.5% Q-o-Q. Y-o-Y growth was impressive, driven by EBITDA margin improvement & higher other income (Rs. 210 mn compared to negative Rs. 189 mn in Q3FY14). Other income in Q3FY15 included forex gains of Rs. 70 mn compared to forex loss of Rs. 272 mn in Q3FY14. Sequential PAT growth was better than expected on the back of improvement in margins. PAT margins improved by 421 bps Y-o-Y, but fell marginally by 2 bps Q-o-Q to 15.4%. EPS for the quarter stood at Rs. 16.8 vs Rs.10.7 in Q3FY14 and Rs. 16.4 in Q2FY15.

Conclusion & Recommendation MTL’s Q3FY15 results were above our estimates on all parameters (though the Q-o-Q USD revenue growth was marginally below the street estimates, it was better than our conservative projections). While we were disappointed with the decline in the volume growth (impacted by furloughs), pricing improvement supported the overall growth, which was encouraging. Good growth reported by key verticals, BFSI, Retail, CPG & Manufacturing and Hi-tech & Media Services (78% of the total revenues) was another encouraging factor. Geographically the growth was concentrated towards US during the quarter. Improvement in pricing driven by rising share from fixed price projects translated into better margins. Rupee depreciation vs. USD also aided in higher profitability during the quarter. The Management commentary on the deal pipeline & growth outlook was optimistic. It expects the growth in 2015 to be better than 2014 on the back of improved client spending & greater concentration on mining its focus clients. It is confident of beating Nasscom’s growth guidance of 13-15% for FY15. The management stated that it is receiving good signals from its Top-30 clients on 2015 IT budgets. Among verticals, retail & CPG and BFSI look promising. Cross selling of underpenetrated services and traction in Digital Initiatives is aiding growth. Mindtree expects a steady demand for FY16 driven by a ramp up in client spends in SMAC Technologies as well as strong traction in the top 30 accounts. Further, the company’s acquisition of Discoverture will provide the much-needed impetus to insurance practice. Greater revenue productivity could lead to better margins going forward. Headwinds from onsite shift in effort are being negated by tailwinds from increased contribution of fixed price projects. Revenue share of fixed price projects continues to rise and this could aid in margin expansion going forward. We feel MTL could surpass our FY15 & FY16 projections. Hence we are enhancing our revenue, operating profit & PAT estimates by 1.5%, 3.4% & 4.3% respectively for FY15 and by 3.2%, 9.5% & 9.5% respectively for FY16. Revised EPS for FY15 & FY16 is estimated at Rs. 65.4 & 78.9 respectively. We are revising our FY16 projections substantially higher to factor in the financials of Discoverture. Valuing the stock at 17.5xFY16E EPS (in line with the overall re-rating in the IT sector and better than expected numbers, we are assigning higher multiples to Mindtree), we arrive at a price target of Rs. 1380. The stock offers limited upside from the current levels. Hence for better returns and margin of safety, we recommend investors to buy the stock only on dips to Rs. 1183-1223 (15-15.5xFY16E Revised EPS) for our price target over the next quarter.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011136