Hold MindTree; target of Rs 660: Way2Wealth

Way2Wealth has recommended hold rating on MindTree with a target of Rs 660, in its July 19, 2012 research report.

“MindTree reported 0.44% sequential growth in USD term topline to $105.50mn backed by equal contribution from both volumes and realizations. Margin also improved sequentially supported by operational efficiency and favorable INR movement against USD. EBITDA margin in Q1FY13 improved by 310bps to 20.85% as currency added 230bps and operational efficiency brought in 80bps, but, partially offset by salary increase which took away 100bps.”

“MindTree’s focused approach towards IT services brought fruit for the company over the last one year. In Q1FY13, IT services grew by 3.13% sequentially against the 5.07% sequential de-growth in Product Engineering. IT services is now contributing 69.00% to the total revenue of MindTree as compared to 63- 64% in the corresponding quarter of the previous financial year. Product Engineering services was hit by two R&D projects being called off during the quarter. Further, the company also dropped seven low-yield accounts during Q1FY13 as part of the customer rationalization exercise consciously undertaken for a few quarters now. Offshore pricing declined 3.6% QoQ (including the cross-currency impact) due to the mix change wherein ADM and IMS grew 3.50% and 19.08% QoQ respectively. At the same time, growth in high-value services was soft with Engineering, Consulting and Package implementation declined sequentially. As per the management, the pricing environment is stable both in PES and IT Services business and there is no overall trend of pricing pressure in the marketplace.”

“During Q1FY13, MindTree’s manpower strength reduced by 170 to 10830 people. We feel, lower manpower addition in Q1 was a deliberate exercise by the management related to the broadening of the employee pyramid and reduction of per capita cost. Most of the 3000 campus offers the company had given for FY13 would be joining in Q2 and Q3 and that would be sufficient for the manpower requirement in a cost effective manner. MindTree is continuing with its focused approach in mining the existing client through restructured sales force and approach. In Q1FY13, Top 5 client (7.16% QoQ growth) and Top 10 client (3.74% QoQ growth) growth was higher than overall company growth. The company’s count of $10mn client also increased by one client in the previous quarter. Going forward, MindTree management will be investing more in S&M activity to create a right balance between client mining and farming. The company is also increasing onsite strength to strengthen customer relationship and to increase customer proximity.”

“MindTree is best placed among the Tier II Indian IT services offshoring companies to sustain and get higher growth due to their diversified vertical and service offerings, renewed focus of the management to get growth in annuity based business streams and revamped vertical focused sales initiatives. Margin levers are also very high as the company is at the end of transforming its business and fruits have already started coming in terms of better revenue growth. But, the recent rally in the stock prices left little room for short term upside and we believe valuation matrix re-rating would take some more time. We are recommending HOLD with target price of Rs660 after discounting FY13 EPS by 10x,” says Way2Wealth research report.  

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