Mindtree Ltd - Express Idea

India Infoline News Service | Mumbai |

In the near term, Mindtree’s operating margin could marginally trend downward due to salary hike (for ~20% of employees), investment in strategic human capital and the impact of recent large addition in billable employees.

CMP Rs1,417, Target Rs1,550, Upside 9.4%

Sustained revenue growth momentum building-up

Over the past six quarters, Mindtree has witnessed healthy dollar revenue CQGR of 3%. More importantly, the growth build-up has picked-up underpinned by ~US$400mn worth of deal wins in the past three quarters. The company has already seen a sharp acceleration in revenue growth during H1 FY14 (13.5% yoy v/s 7% yoy in H2 FY13). Management is pretty confident about revenue traction sustaining and this is reflected in substantial employee additions over past three quarters (cumulative addition of 18% software professionals on Q3 FY13 base). With overall demand environment also supporting, we estimate Mindtree to comfortably manage 16% dollar revenue CAGR over FY13-15.


Quality of growth also improving 

What is also impressive about Mindtree is good quality of growth driven by intense efforts towards client mining and cross-selling of services. Progress in client mining is manifested in addition of four customers in US$5mn+ revenue bucket over the past 12 months and robust revenue growth of 18.5% yoy for Top 6-10 clients on LTM basis. Vertical-wise, growth is becoming more broad-based with improving contribution of even hi-tech space. Amongst services, company is investing ERP/Consulting and data warehousing/analytics hoping to repeat the growth success of IMS/Tech Support.


Significant scope for margin to improve in the longer term

In the near term, Mindtree’s operating margin could marginally trend downward due to salary hike (for ~20% of employees), investment in strategic human capital and the impact of recent large addition in billable employees. However, in medium-to-longer term, sustained brisk growth would bring operational efficiencies which will drive material margin gains. Key sources of operational improvement would be age pyramid, SG&A leverage and employee utilization (currently at four-year low). We estimate FY15 OPM to be at least 100bps higher than FY14.


Top Pick in our mid-cap IT coverage

Given a more predictable and strong earnings growth outlook vis-à-vis peers, Mindtree’s valuation at 11x FY15 P/E (in-line with them) is very attractive. Expect an immediate re-rating if OPM fall in Q3 FY14 turns out marginal.   


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
19,152
23,618
30,242
36,264
yoy growth (%)
26.9
23.3
28.0
19.9
Operating profit
2,930
4,860
6,022
7,647
OPM (%)
15.3
20.6
19.9
21.1
Reported PAT
2,185
3,389
4,804
5,363
yoy growth (%)
115.1
55.1
41.7
11.6

 
 
 
 
EPS (Rs)
54.0
81.7
115.8
129.2
P/E (x)
26.3
17.4
12.2
11.0
Price/Book (x)
6.0
4.5
3.4
2.7
EV/EBITDA (x)
19.5
11.9
9.4
7.2
RoE (%)
25.2
29.8
31.6
27.5
Source: Company, India Infoline Research
BSE 566.00 1.75 (0.31%)
NSE 566.55 0.95 (0.17%)

***Note: This is a NSE Chart

 

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