Hold MindTree; target of Rs 673: KRChoksey

“MindTree, revenue growth in Q1 FY13 was in-line with our expectation and the management guidance. However, the management has revised downward its FY13E revenue guidance to in-line with industry growth rate from higher than industry growth rate (i.e. NASSCOM guidance of 14% YoY growth in FY13E). The management has downward revised its guidance for PES to flat or marginal growth in FY13E (in USD terms) from its previous expectation of higher single digit growth in FY13E and hence ramp-down its overall revenue growth guidance for FY13E. The improvement in EBITDA margin by 210 bps QoQ in Q1 FY13 was primarily supported by one-off decline in Other Operating Expenses (excl. sub-contractor charges) by 14% QoQ i.e. decrease of 338 bps QoQ as percentage of sales.”

“We believe EBITDA margin will be under pressure in coming quarters on back of freshers intake and full impact of wage hike. Moreover, the company has outstanding hedge of $122 mn at an average rate of Rs.50.3/USD expiring in FY13E which will further dent net margins at current exchange rate level. Taking into account, downward revision of FY13E revenue guidance by the management, pressure on margins from the current level and outperformance of the stock in last 3 months by 12% as compared to BSE- IT index, we believe the stock is fairly valued at current price level and hence downgrade our recommendation on the stock from “BUY” to “HOLD”.

“The management has downward revised its FY13E revenue guidance to in-line with industry growth rate from its previous target of higher than industry growth rate in FY13E. The ramp down in expectation by the management is primarily due to expectation of flat to marginal growth in PES in FY13E (in USD terms) from its previous expectation of higher single digit growth rate. The improvement in EBTIDA margin by 210 bps QoQ to 20.9% in Q1 FY13 came better than our expectation of increase in margins by 148 bps QoQ. The spike in margins was led by decline in Other Operating Expenses (excluding sub-contractor charges) by 14% QoQ i.e. 338 bps QoQ decline as percentage of sales, which seems to be one-time especially considering detail break up of other operating expenses (for instance travel expenses declined to Rs 22 crore in Q1 FY13 from Rs 31 crore in Q4 FY12 and Rs 26 crore in Q1 FY12).”

“We marginally reduce our volume growth forecast for FY13E due to the management expectation of muted growth in PES FY13E. We recommend “HOLD” on the stock with a target price of Rs.673 by assigning multiple of 10 times to its FY13E EPS of Rs 67.3,” says KRChoksey research report. 

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