Accumulate MindTree; target Rs 496.7: Aditya Birla Money

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Accumulate MindTree; target Rs 496.7: Aditya Birla Money

Aditya Birla Money is bullish on MindTree and has recommended accumulate rating on the stock with a target of Rs 496.7 in its January 20, 2012 research report.

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Aditya Birla Money is bullish on MindTree and has recommended accumulate rating on the stock with a target of Rs 496.7 in its January 20, 2012 research report.

"MindTree registered an impressive topline growth of 13.8% to Rs 5197 mn from Rs 4567 mn on sequential basis and an increase of 35.5% from Rs 3847 mn on YoY basis. It witnessed a pricing uptick of 3.5% and a volume decline of 0.8% leading to a 2.3% growth in $ terms. IT services continued to grow at a healthy rate of 6.3%, thanks to milestone revenue from new Top client. Software Product Engg (SPE) registered a negative growth of 5%, due to seasonal weaknesses and intentional close down of few accounts. The company is confident of getting back SPE segment to growth trajectory in Q4. Travel & Transportation (T&T) led the growth with an increase of 16.4%. On geographical basis, Europe witnessed a good traction of 11.8%, followed by 8.6% growth from RoW (in $ terms). EBITDA jumped by 52.6% to Rs 897 mn from Rs 588 mn (QoQ) and margin improved by 438 bps to 17.3%, largely driven by favourable rupee and operation efficiency of 30 bps. Strong employee additions at the bottom of the pyramid and improvement in utilization would act as a structural levers for MT in the upcoming quarters, besides favorable rupee. PAT improved by 11.2% to Rs 606 mn from Rs 545 mn (QoQ), despite forex loss as against one-time gains in other income and forex gain in Q2."

"MT's changed strategy of penetrating deeper into top clients & few verticals concentration have started to fructify, which resulted in notable increases in top clients numbers ($1 mn clients & $20 mn clients increased from 72 & 2 to 74 & 3 respectively). In addition to it, top client account grew by 19.8% (contributing 8.5%), Top 5 Clients grew by 12.1% (contribution increased to 30.7% vs 28%) and Top 10 clients grew by 7.1% (44% vs 42%). During Q3, MT has added 9 new clients and 354 net additions taking the total employee base to ~11k. Based upon the strategy, chosen services segments such as IMS (9.6%), Package Implementation (64.9% because of an onetime milestone revenue from Top Client) and IP & consulting (11.1%) grew significantly. Attrition has come down to 19.4% from 21.4%."

"The Q3 revenues were inline with estimates, margin improvement and bottom line came as a positive surprise. We revise our earnings upwards by 30% for FY13E, predominately to factor in the favourable rupee and better than expected margin improvement. Management sounded cautious on Q4 results (similar kind of Q3 growth), especially in SPE segment, BFSI followed by manufacturing verticals. However, we remain positive and believe MT is on the right direction on the strategic front and strong execution for three consecutive quarters brought them back to the industry levels. We believe that there are further internal levers for margin improvement and client mining strategy give us confidence in the company, nevertheless from here onwards the business performance would largely be a factor of overall opportunity in the Industry and less of internal improvement. The stock has moved up by ~35% from Aug lows on the back of strong 9M performance. Currently, MT trades at a consolidated P/E of 8.5x and 8x on its FY12E & FY13E EPS of Rs 51.5 & Rs 55.1 respectively. We value MT at 9x (reduced from 10.5x to factor in the upgradation in earnings, due to short term rupee impact, which we believe is not sustainable) of on its FY13E earnings of Rs 55.1, and reiterate our Accumulate rating with revised target price of Rs 496.7," says Aditya Birla Money research report.

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