Mindtree Ltd (Q1 FY13)

CMP Rs642, Target Rs750, Upside 16.8%

• Mindtree Ltd registered an in-line revenue performance in Q1 FY13, growing 0.5% qoq to US$105.5mn. Volumes (+0.2% qoq) were largely flat as the decent growth of IT services (3.1% qoq in dollar terms) was offset by the ramp-down of R&D projects in two key Product Engineering (PES) clients. Onsite volumes continued to be impressive, growing 7.2% sequentially as deals won in recent past were ramped up. Pricing stabilized (+0.4% qoq) post the last quarter’s one-off correction.
  
• Amongst the verticals, BFSI led the growth at 4.3% qoq in dollar terms. Within service lines, IMS (+16% qoq) and Application Development (+4.2% qoq) led the growth while discretionary services like Package Implementation (-16.3% qoq), Engineering (-9% qoq) and Consulting (-2.5% qoq) were the laggards. Within PES, sub-segment of Enterprise Solutions continued to do well while others like Consumer/communication and Portals lagged.  Within clients, Top 2-5 bucket once again outshined, growing 8.9% qoq in dollar terms. At 4.5% qoq, Europe grew the fastest among the geographies, while India (-14.3%qoq) and RoW (-10.2%qoq) dragged down the overall performance.
  
• Q1 FY13 results exceeded estimates, with margin expanding 212bps against our expectations of 150bps. This was despite one month’s impact of salary hikes for 80% of the employees. The impact of salary hike (-100bps) was materially offset by rupee depreciation (+230bps) and operational improvement (+80bps). Improving employee pyramid, selective replacement of attrition and better pricing were the primary reasons for the improvement in margin. Other income came largely in-line at Rs138mn. With higher than expected taxes, the PAT was along expected lines at Rs890mn. On the employee front, there was an absolute decline in the number of technical people, as the company sought to selectively replace attrition. Total headcount was 10,830 (down 157 sequentially).
  
• Management commentary continued to be cautiously optimistic, with an expectation of growth in-line with NASSCOM estimates (11-14%). While the management now expects PE services to grow in lower single digits, IT services business is expected to continue to show decent traction in FY13. While the company faced slightly elongated decision cycles, there were no instances of budget cuts or pricing cuts. On the employee front, the company has guided for 3,000 fresher additions for FY13 and need based lateral hiring.
  
• The Q1 FY13 performance of Mindtree was largely in-line with expectation. The higher than anticipated expansion in margin was mainly due to strong rupee depreciation benefit and reduction in people count. Management commentary has become slightly more cautious and rightly so, considering the weakness in the overall demand environment. Nonetheless, the guidance to grow 11-14% (in-line with industry) despite lower single digit growth expectation in PE services indicates decent revenue visibility and traction in key focus verticals as well as IT services. We expect the company to post 11% dollar revenue CAGR while profits are expected to grow faster at 27% CAGR over FY12-14E. We continue to remain positive  and maintain BUY with 9-month TP of Rs.760.