Accumulate MindTree; target of Rs 500: Emkay

“After 2 successive qtrs of strong rev growth, MindTree reported a relatively anemic 2.3% QoQ growth in revenues to US$ 103.7 mn( +3.1% QoQ in c.c terms), just tad below est( US$ 104.2 mn). However margins continued to surprise positively as they improved by ~440 bps QoQ to 17.3%, highest in 7 qtrs albeit aided by weak currency. Profits at Rs 606 mn (+11.2% QoQ) came inline despite better op performance impacted adversely by forex losses of Rs 25 mn (V/s est of gains of Rs 40 mn). While a 0.8% QoQ decline in vols disappointed, rev growth was bolstered by one time transition based fees from one of the top clients. Although new client addition was slow, co continues to improve client mining with top 1/5/10 clients growing by ~20/12/7% sequentially. Revenues from Europe grew strongly by ~12% QoQ with IMS growing by ~10% QoQ(accounts for ~10%+ V/s 4% of rev in March’10 qtr). Headcount addition was decent at 354 taking the total HC to 10,934 , however qtrly annualized attrition remained nearly flat sequentially after the sharp fall in Sep’11 qtr”

“MindTree management cited some delays in decision making at clients (especially financial services), however remains confident on growth as it sees clients budgets remaining firm with clients remaining committed to spend even in Europe. Further the company plans to hire ~3k freshers from the campus for FY13 (V/s ~2k in FY12) which will help broaden employee pyramid in the medium term and help improve margins. Company remains confident of achieving similar revenue growth during March’12 qtr and expects to register modest growth in the PES segment as well on account of higher number of working days in March’12 qtr after planned shutdowns in Dec’11 qtr.”

“While we leave our US$ revenue estimates nearly unchanged. Our FY12/13E earnings are upped by ~18%/12% to Rs 48.4/50.4 aided by lower currency resets to Rs 49.5/$ for FY13. MindTree remains amongst our preferred bets in mid tier IT Svcs space as we retain ACCUMULATE with a revised TP of Rs 500 (V/s Rs 450 earlier) albeit expect some pause after a 25% upmove in the past 6 months,” says Emkay Global Financial Services research report.

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