Buy Mindtree; target Rs 737: FinQuest Securities

"Mindtree Ltd. (MTCL) was not completely immune from industry-wide growth deceleration, as MTCL delivered a soft quarter on revenue growth. Dollar revenues came in at US$105.5mn, up 0.4% sequentially. Even though the top line at Rs 5.63bn was slightly lower than consensus estimate of Rs 5.66bn, the bottom line at Rs 890mn was way ahead of consensus estimate of Rs780mn. Sharp sequential depreciation of the Re drove both solid operating profit as well as net profit growth which came in ahead of expectations despite higher taxes. Volume growth and pricing remained flat Q-o-Q at 0.2% and 0.4% respectively. IT services continued its strong momentum, led the pack with 3.3% growth whereas Product Engg. Services (PES) declined by 5.5% due to ramp down of couple of clients (in $ terms QoQ). On industry performance, BFSI and Manufacturing led the growth, up 4.2% and 3.7% Q-o-Q respectively. On geographical basis, Europe witnessed a good traction posting growth of 4.4%, followed by 1.8% growth from US (in $ terms). MTCL has consistently beaten analysts estimates and is an indication of improving operating performance. We believe continued focus on margin improvement along with steady revenue growth would result in better growth compared to its peers."

"Revenue grew by 1.2% sequentially to Rs 5.63bn (Cons: Rs5.35bn) in INR terms and grew by 1.3% in USD terms to $105m. IT services continued its strong momentum, led the pack with 3.3% growth whereas Product Engg. Services (PES) declined by 5.5% due to couple of clients ramp down (in $ terms Q-o-Q). MTCL added 19 clients in Q1FY13, higher compared to six, nine & 15 in Q4, Q3 & Q2FY12, respectively. Client mining also improved sequentially. Contribution from Top 5 clients rose 2.1% Q-o-Q & grew 7.2% Q-o-Q. EBITDA margins expanded by 212bps sequentially to 20.9% in Q1FY13. A positive currency impact drove a 230 bps expansion, 80 bps from operating efficiencies which was offset by the impact of salary increases of 1%. COGS was down as a % of sales as many senior executives who left were replaced with younger ones. Higher VISA costs from April 1st 2012 could throw up some headwinds for COGS going ahead."

"Even as the mid-sized companies are placed relatively better given that they do not depend on highcompetition 'large deals' segment for growth, they are not completely immune from slow decision making and modest pricing pressure on existing business. MTCL has witnessed a steep deceleration in Y-o-Y revenue growth trajectory to 14% from 22% in Q4FY12. To achieve this, the company requires minimum growth rate of 3.8% from Q2-Q4FY13, which looks a bit stretched. Keeping that in notice, we expect USD revenue to grow by 8% Y-o-Y in FY13. On the margin front, MTCL has continued to do well over the past few quarters as it rationalized its employee pyramid and cut down on SG&A. These moves by the company as well as INR depreciation helped MTCL to improve its margins from 11.8% in FY11 to 15.3% in FY12. This trend has continued into FY13 as well and the management has even guided for maintaining the margins at the current levels for Q2FY13 as well."

"We cut our US$ revenue estimates for MTCL by 7% and 6% for FY2013E and FY2014E to US$434 mn and US$495 mn, respectively however we now build in EBITDA margins at 19.9%/20.8% (v/s 17.6/18.7% earlier as MTCL's improvement in margins continues to deliver above expectations) providing an upside of 18%/10% in FY13/14E earnings to Rs 73.7/82.5 respectively from our earlier estimates. Valuations appear attractive at 8.8x FY13E earnings given the potential upside to our estimates from margin expansion and currency benefit. We maintain our BUY rating on the stock while revising our target price from Rs 627 to Rs 737 at which MTCL would trade at 10.0x on FY13E EPS of Rs 73.7," says FinQuest Securities research report.

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