Mindtree Ltd (Q2 FY13)

India Infoline News Service | Mumbai |

Volume growth registered was 1% qoq, slightly lower than expected but offset by 0.6% up-tick in pricing.

CMP Rs678, Target Rs760, Upside 12.1%

  • Mindtree Ltd. has posted an in-line revenue performance in Q2 FY13, with dollar revenues growing 1.7% sequentially to US$107.3mn. Volume growth registered was 1% qoq, slightly lower than expected but offset by 0.6% up-tick in pricing. As guided by the management, Product Engineering (PE) Services showed improved performance, growing by 3.3% qoq in dollar terms. On the flip-side, near completion of a large engagement and slower than anticipated project ramp-ups were the key reasons for the tepid IT Services growth (1% qoq in dollar terms).
  • Growth was mixed across verticals, services and geographies. Within verticals, BFSI led the growth (+6.3% qoq) followed by Manufacturing (+3.4% qoq). Among the larger services, IMS and Independent Testing grew the fastest at 16.2%/ 3.5% qoq, respectively. Software Products segment continued to support growth in PE Services with semi-conductor and telecom segments being the top laggards. Among the client buckets, the growth was driven by top client, which posted 8.4% qoq improvement. Non Top-10 clients also grew at a decent clip of 2.3% while Top 2-5/Top6-10 buckets de-grew 0.7%/3.2% qoq, respectively.
  • Mindtree’s Q2 FY13 OPM performance was commendable with margin expanding 126bps qoq (versus expectation of 80bps correction) despite strong wage hike headwind. Operational efficiency (+250bps impact) and rupee depreciation (+140bps impact) more than offset the headwinds from salary hike (-180bps impact) and higher branding expenses (-70bps impact). Better than estimated OPM and significantly lower taxes (due to reversal in taxes provisioning) led to a significantly higher growth in PAT (despite material forex losses). On the employee front, attrition eased to 16.3% versus 17% in Q1 FY13.
  • Management is cautious on the near term demand environment and resultantly now expects FY13 dollar revenue growth to be lower than industry benchmark (11-14% yoy growth). Slowdown in decision making/ramp ups, volatile PE services business and completion of a mega engagement have been attributed as the key reasons. From the hiring perspective, company expects 2000 freshers to join in next 2-3 quarters (joining ratio 70-80%) and has given 1000 additional campus offers for FY14.
  • Mindtree continues to impress us by its operational improvement, beating our margin estimate yet again, this time by 200bps. Over the past four quarters, OPM has expanded by 925bps with significant improvement in operational efficiencies. In view of slowing demand, tepid execution environment and cautious management guidance, we marginally reduce our growth expectation. We now estimate dollar revenues to witness a 9% CAGR over FY12-14E. On the back of the substantial margin beat, we now expect earnings to grow at 25% CAGR over the same period. Maintain BUY with 9-month TP of Rs760.
Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 5,963 5,630 5.9 4,567 30.6
Operating profit 1,319 1,174 12.4 588 124.3
OPM (%) 22.12 20.85 127 bps 12.87 925 bps
Depreciation 159 159 - 174 (8.6)
Interest 4 3 33.3 1 -
Other income (341) 138 (347.1) 241 (241.5)
PBT 815 1,150 (29.1) 654 24.6
Tax 93 260 (64.2) 109 (14.7)
Effective tax rate (%) 11.4 22.6 - 16.7 -
Adjusted PAT 722 890 (18.9) 545 32.5
Adj. PAT margin (%) 12.1 15.8 (370) bps 11.9 18 bps
Reported PAT 722 890 (18.9) 545 32.5
EPS (Rs) 17.7 21.9 (19.3) 13.5 30.5
Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues (Rs m) 15,090 19,152 23,374 25,106
yoy growth (%) 16.4 26.9 22.0 7.4
Operating profit 1,778 2,930 5,028 4,880
OPM (%) 11.8 15.3 21.5 19.4
Reported PAT (Rs m) 1,016 2,185 3,184 3,404
yoy growth (%) (52.7) 115.1 45.7 6.9
         
EPS (Rs) 25.4 54.0 78.6 84.1
P/E (x) 26.7 12.5 8.6 8.1
Price/Book (x) 3.5 2.9 2.2 1.8
EV/EBITDA (x) 15.0 9.3 5.1 4.9
RoE (%) 14.0 25.2 29.0 24.5
RoCE(%) 18.0 29.4 35.9 31.9
Source: Company, India Infoline Research

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