Buy MindTree; target of Rs 700: PLilladher

We spoke to Mr. Sushanth Pai of MindTree (MTCL) to understand the growth opportunity from new focus area and scope of margin improvement. The management cited no panic from the client’s IT spending pattern. The company is keeping a strict vigil on levers to improve margin. We reiterate ‘BUY’ rating.

“MTCL expects to deliver growth of 14%+ (in USD terms) lead by stronger growth in IT services and high single-digit growth in PES. The company is seeing good traction in the US with stable environment in Europe. In terms of verticals, BFSI (due to focus on tier 2-3 banks) is stable and travel & transportation is seeing good traction. For Q1FY13, the company expects muted growth with strong margin improvement. MTCL’s strategy to focus on existing clients, and increase their wallet share is paying good dividends as revenue/client has risen by 9.2% CQGR (since Q4FY11) quarters (Exhibit 2). We expect the top 10-20 clients’ share to grow, by cross-selling of services. Moreover, focus on few clients helped company to deliver 22% YoY growth with the same sales workforce. However, we expect push for S&M investment in-line with revenue growth in FY13. MTCL’s effort to rationalize employee pyramid will give further push to EBITDA margin in FY13. The company reduced per employee cost in FY12 (Exhibit 1). MTCL will hire ~3k fresher in FY13, but 67% (incl. trainees) utilization leaves room for further manoeuvrability (Exhibit 5) in-terms of joining date for the fresher.”

“MTCL recently hired a senior person (Mr. Greg Blount as Senior VP and Head of US Strategic Accounts) from TPI to focus on large deals (US$25m+). The focused approach to mine few clients and win large deals would help MTCL to deliver growth ahead of industry. Renewed focus on core-business (FY12) has pushed the performance ahead of peers. We expect steady top-line growth, but margin focus to accelerate EPS growth, hence room for positive surprise in FY13. We revise TP of Rs700 (from Rs610), 10x FY13e earnings estimate,” says Prabhudas Lilladher research report.

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