Recommendations » India

MindTree 3QFY2013 performance highlights and results update

Contributed by Angel Broking

MindTree reported broadly in-line set of results for 3QFY2013 with profit ahead of our estimates, aided by higher other income. The volume growth was muted at -0.7%. But on the positive side the company has been able to inch up its price realization by 2.6% qoq. MindTree has been one of the good performers on the revenue as well as margin front in the Indian IT mid-cap space, posting a 3.5% CQGR in its revenue over the past eight quarters. We maintain Accumulate rating on the stock.

Quarterly highlights: For 3QFY2013, MindTree reported USD revenue of US$109.9mn, on the back of 2.6% qoq improvement in blended realization. The EBITDA and EBIT margin of the company declined by 172bp and 162bp qoq to 20.4% and 17.8%, respectively. This was due to increase in SG&A expenses as a percentage of sales by 140bp qoq to 20%, as the company increased its investments on the front end citing growth revival. The PAT came in at Rs.99cr, up 36.8% qoq, largely led by higher-than-expected other income of Rs.21cr as against Rs.34cr loss in 2QFY2013.

Outlook and valuation: MindTree’s Management indicated that it remains hopeful of FY2014 turning out to a better revenue growth year as compared to FY2013 because of pick up in client spending (backed by a positive survey of its ~50 top clients) as well as a result of company’s greater concentration on mining its focus clients. Even within the PES segment, the company cited better prospects in FY2014 as against in FY2013. Within PES, growth outlook in the ISV and semiconductors space is sanguine, while the segments still under some stress are consumer and communications. MindTree is currently chasing eight large deals of +US$25mn TCV and expects few of them to get closed in the next couple of quarters. Overall, we expect the company to record a 9.3% and 16.4% CAGR in USD and INR revenue, respectively, over FY2012-14E. We expect the company to record a 30.3% CAGR in its EBITDA and 27.1% CAGR in PAT over FY2012-14E. We value the stock at 10x FY2014E EPS, translating into a target price of Rs.868, and maintain our Accumulate rating on the stock.