Subscribe to MindTree IPO; bright future: First Global

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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 First Global report on MindTree Consulting IPO:

MindTree Consulting's key strength lies in its promoters, Ashok Soota,  Subroto Bagchi and eight others, who came together to form the company in 1999, with the initial funding being contributed by three of them. In a short span of 7 years, the company's revenues have crossed the USD 100 million mark (a 4-year CAGR of 57.5%).

MindTree posted a respectable EBIDTA margin of 18.3% in Q3 FY07, up from 3% in FY03. The margin expansion has come on the back of declining S,G&A expenses from 33.8% in FY04 to 22.2% in Q3 FY07. MindTree's revenue per employee, which is one of the key health indicators for a software company, stands at Rs 1.5 million per annum, although its is lower than that of the bigger players, such as Infosys (Rs 2 million) and TCS (Rs 2.2 million), while comparing favourably with that of mid-size companies, such as iGate (Rs 1.4 million) and Sasken (Rs 1.3 million).

MindTree also has a significantly lower attrition rate of 12%, as on FY06, in comparison to that of companies similar in size (Polaris 14.4%, Sasken 23%, Infotech Enterprises 14%, Geometric 20.4%, and Patni 24.5%) and is also quite comparable to that of some of the large cap players (Infosys 11.2%, Wipro 15%, TCS 9.9% and Satyam 19.2%, as on FY06).

The company's free cash flow from operations had earlier been negative due to lower profitability, as well as the CAPEX and working capital requirements for funding its growth. However, the free cash flow from operations turned positive in Q3 FY07. Considering the expected increase in MindTree's future profitability, we believe that the company's free cash flow from operations will improve further.

The overall picture appears bright for MindTree and we expect the company to record a significant topline and bottomline growth in the future. 

At the upper price limit (Rs 425 per share), the stock will trade at 18.2x its FY07 annualised basic EPS of Rs 23.4, which appears cheap in comparison to the FY07E P/E of Sasken (30.8x), iGate (25.1x), and KPIT Cummins (21.5x).

We expect EBITDA Margin to continue expanding, as the company achieves greater scale. We, in any case, have loved the mid-cap IT space. MindTree is a very welcome addition to the pack. We have no hesitation in recommending Subscribe.