Reduce MindTree; target of Rs 675: KRChoksey

“MindTree expects IT services growth rate in constant currency (CC) terms to come down marginally in Q2 FY13E from around 4% QoQ in CC terms in Q1 FY13. However, they expect overall revenue growth rate in Q2 FY13E to be marginally higher than Q1 FY13 supported by growth in PES in Q2 FY13E as compared to decline in Q1 FY13 on QoQ basis.The management expects EBITDA margin to be more or less stable in Q2 FY13E on QoQ basis. The adverse impact of wage hike will be mitigated by benefit from higher Indian Rupee (INR) realization against US Dollar (USD) i.e. Rs.55.5/USD in Q2 FY13E compared to Rs.53.4/USD in Q1 FY13.”

“The company maintained its FY13E revenue estimates i.e. growth In-line with NASCCOM projection of 11%-14% (in USD terms). We believe, the company will miss its overall revenue growth target for FY13E because (1) it assumes budget flush by clients in H2 FY13E will support higher growth in IT services in H2 FY13E as compared to H1 FY13E; whereas peer sets such as TCS expects H2 FY13E to be lack luster compared to H1 FY13E in terms of client IT spend (2) expectation of flat revenue in PES on YoY basis (in USD terms) seems optimistic at current point of time unless the company signs large deal in H2 FY13E.”

“We believe the margins are likely to come under significant pressure in Q3 FY13E especially considering recent trend of INR appreciation against USD. For instance, 1% INR appreciation against USD will adversely impact EBITDA margin by 44 bps. Moreover, full impact of wage hike will be felt in Q3 FY13E. Further, the company plans to make investment in strengthening its sales team, building its leadership team and promoting its brand; hence SG&A expenses is likely to increase from the current level.”

"The consensus earnings estimates upgrade cycle in case of MindTree is primarily led by two factors (1) favorable exchange rate movement and (2) increase in margin led by operating efficiencies. We believe, both the above mentioned factors is losing steam or turning unfavorable for the company. Moreover, the demand environment has not changed material as can be observed from consensus revenue estimates. Taking the same into account, we expect the consensus earnings estimates to be downgraded, going forward, especially considering recent INR appreciation trend against the USD. We recommend reduce on the stock with a target price of Rs.675 by assigning multiple of 9.5 times to its FY14E EPS of Rs. 71.1,” says KRChoksey research report.

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