Networth strongly recommends to subscribe MindTree IPO

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MindTree Consulting, an international IT and R&D Services Company that delivers business and technology solutions through global software development, is open for subscription with an initial public offering, IPO of 5,593,300 equity shares of Rs 10 each at a price band of Rs 365 to Rs 425 per equity share through the 100% book building process.

The issue will constitute 15% of the post-Issue capital of the company and the net issue will constitute 13.25% of the post-Issue capital of the company.

The Networth Stock Broking report on Mindtree Consulting IPO:

Company Profile

Mindtree Consulting is a Bangalore based technology company that delivers business and technology solutions through global software development. They are organized into two divisions - IT services and Research and Development Services. For Fiscal 2006, IT services contributed approximately 76.5% of their total revenues and R&D services contributed approximately 23.5% of the total revenues.

Investment Rationale

Niche Area of operation

Since its inception, Mindtree has concentrated its efforts in the niche areas of IT consultancy and R&D services. With the market burgeoning for both the verticals and more offshoring being witnessed in these service offerings, Mindtree is set to benefit from it. Their areas of operation is described as below:

IT Services

• IT strategic Consulting
• Application Development & Maintenance
• Data Warehousing
• Business Intelligence
• Package Implemetation
• Application Product Engineering Services

The IT Services business offers services with a strong focus on certain industries such as BFSI, Manufacturing, Travel and Transportation.

R&D services are organized into two divisions - Engineering, which provides product realization services to technology and product firms. Research - conceives and develops intellectual property primarily in the short range wireless communication segment and licenses and customizes such IP for their clients.

Phenomenal growth

The Company has achieved substantial growth in revenues in recent years. Their revenues have grown at a compounded annual growth rate of 46.9% from Rs 656.0 mn in FY01 to Rs 4488 mn in FY06. Their net profit growth grew at a compounded annual growth rate of 360.2% from Rs 25.1mn in FY04 to Rs 542.1mn in FY06. The acquisitions made in 2004 and 2005 have been insignificant in terms of contribution to revenues. Therefore, majority of the growth is organic. Their people strength increased from 442 as of March 31, 2001 to 3128 as of March 31, 2006.

Marquee Clients

The top 5 customers accounted for 38.4% of the total revenues and the top 10 customers accounted for 51.8% of the total revenues. The top customers included Fortune 10 Company like American International Group and a Fortune 100 company like United Technologies Corporation. Some other distinguished customers include names like Avis Budget Group, LSI Logic, Symantec, Unilever and Volvo.

The customers are spread in different geographies with US accounting for 63% and Europe 22% of the total revenues. The rest comes from the APAC region.

Extremely talented management

The management is a distinguished set of personnels in the IT industry. All the 10 founders of the company have still stuck with the present company. They all have more than 15 years of industry experience. Bulks of them (including, Mr. Ashok Soota and Mr Subroto Bagchi) have come from Wipro and Lucent Technologies.

Valuation

Comparison with the listed companies

Company	EPS (Rs)	P/E (times)	RONW (%)	NAV	Sales (Rs Mn)
Mind Tree Consulting	20		41.8	43.8	4,488
HCL Technologies	19.7	27.4	12.8	79.5	30,329
I-Flex Solutions	29.1	39.1	19.4	239.8	11,538
Infosys Technologies	40.4	39.4	39.9	124.1	90,280
Patni Computer	12.6	49.5	11.5	147.8	8,756
Polaris Software	1.2	39.7	2.5	54	6,839
Satyam Computer	15	22.8	26.9	66.1	46,343
TCS	26.8	32.5	60.9	57.3	112,305
Tech Mahindra	17.7	27.4	40.7	69.5	11,971
Wipro	13.2	32.9	35.7	44.7	102,271

 

 

 

 

 

 

 

(Note: P/E computed assuming trailing twelve month earnings and closing price as on October 30,2006. The company's EPS is for the Fiscal 2006. All financial details for the industry peers i.e. EPS, RoNW, NAV AND Sales are as of the most recent fiscal reported. Fiscal end is as of June for HCL Technologies, as of December for Patni Computer, and as of March for all other peers enlisted.)

Comparing it with the peers, the stock is priced attractively at 14.6 times at its lower band and 17 times at its upper band on an annualized basis for FY07.

Recommendation

Owing to the strong performance, excellent management track record and their operations in key verticals, we strongly recommend our investors to subscribe the issue.