Buy MindTree; target of Rs 575: KRChoksey

“The revenue growth in USD terms in Q4 FY12 was marginally better than our expectation. However, the management has cautioned that over the span of last 4 weeks it is registering delay in spending in BFSI and product engineering segment which will lead to muted growth in Q1 FY13E. Nonetheless we believe that the investment done by the company in hiring senior talents in IT services and setting up onsite delivery centre in US puts the company in sweet spot in winning large deals (especially in the range of $25-$50 mn) which will enable it to maintain higher than industry growth rate in FY13E."

"The improvement in EBITDA margin by 148 bps QoQ in Q4 FY12 against our expectation of increase in margins by 17 bps QoQ came as positive surprise. The company has handed out 3,000 campus offers in line with its plan to widen its employees pyramid based. This will reduce average offshore employee cost and will assist the company to improve the margins (in constant currency terms) in FY13E inspite above said investments being undertaken by the company. Taking the same into account we upgrade our recommendation on the stock from “ACCUMULATE” to “BUY”.”

“The revenue in USD terms increased by 1.3% QoQ (in USD terms) against our expectation of 0.4% QoQ growth in Q4 FY12.The growth continues to be led by top 10 clients which indicates that the company’s strategy of focusing on specific accounts and verticals continues to play out well. The management guided for muted growth rate in Q1 FY13E primarily due to delay in decision making registered in BFSI space and ramp-down in couple of clients in product engineering segment over the span of last 4 weeks. However, we believe the delay in decision making in BFSI seems to be industry wide trend and also the company’s exposure to BFSI (around 20% in Q4 FY12) is one of the lowest among peer sets. Moreover, the company has made investment in building client facing team in IT services which will start showing results in coming quarters and will support higher than industry’s growth rate in FY13E.”

“The company’s strategy of widening its employee pyramid base, by replacing experienced employees with lower experienced ones, supported decline in its average offshore employee salary from Rs.0.7 mn in Q4 FY11 to Rs.0.67 mn in Q4 FY12 despite around 10%-12% wage hike in FY12. This supported higher than expected improvement in EBITDA margin in constant currency terms in Q4 FY12 and FY12. We marginally reduce our volume growth forecast for FY13E due to the management expectation of muted volume growth in Q1 FY13E; however we are improving our EBITDA margin assumptions due to better than expected improvement in margin in Q4 FY12. We recommend “BUY” on the stock with a target price of Rs 575 by assigning multiple of 10 times to its FY13E EPS of Rs. 57.5,” says KRChoksey research report.

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