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MindTree up 10% on strong Q4, What's behind the turnaround?

MindTree shares jumped over 10% on Tuesday after the software service provider reported better-than-expected earnings in the fourth quarter.

April 17, 2012 / 11:03 PM IST
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Moneycontrol Bureau

MindTree shares jumped over 10% on Tuesday after the software service provider reported better-than-expected earnings in the fourth quarter.

Last week technology bellwether Infosys had shocked the markets with lower-than-expected results in the fourth quarter and guided for FY13 US dollar revenue growth, much lower than the 11-14% growth industry body NASSCOM expects.

MindTree's performance was in a stark contrast. It didn't provide specific guidance for the current fiscal year, but said it would grow faster than the industry. CEO KK Natarajan told reporters they were seeing increased scrutiny on budgets but not hearing of large budget cuts.

Just a little over a year ago, MindTree's co-founder and executive chairman Ashok Soota had abruptly resigned, shocking the street, and leaving investors wondering if he had abandoned a sinking ship, as the company had been underperforming the broader IT sector for over a year.

Its consolidated net profit in 2010-11 more than halved to Rs 101.6 crore,

In the Jan-March quarter, however, MindTree surprised with consolidated net profit doubling to Rs 69 crore, beating street expectation of Rs 58 crore. Consolidated net profit for FY12 also more than doubled to Rs 218.5 crore.

What's behind the quick turnaround? 

"MindTree's strong focus on client mining and employee pyramid management played out throughout FY12," said Krupal Maniar and Kuldeep Koul of ICICI Securities.

MindTree has maintained strong focus on top-5 and top-10 clients, with the two growing at a compounded quarterly growth rate of 11.5% and 9.6% respectively over the past four quarters, they say. Further, MindTree has used its employee pyramid adeptly with employees with less than three years experience increasing to 36% of total employee base, compared with 30% a year ago, which has helped bring down average off-shore employee cost by 3.3% year-on-year, Maniar and Koul add.

"MindTree's fourth quarter results were fairly impressive. Volume growth (5%
sequentially) and margin expansion (160 bps quarter-on-quarter) were the attractive features," said Credit Suisse analysts Anantha Narayan and Sagar Rastogi.

Credit Suisse too feels MindTree's renewed focus on mining top clients has enabled it to post robust growth in FY12.

"The company has managed to control costs impressively as well in the past few quarters. Its margins expanded by 460 bps year-on-year in FY12 driven by operational efficiencies, better execution of fixed price contracts and more focus on entry-level hiring thereby bringing down average employee costs," Narayan and Rastogi said.

The company's product engineering business, which was a drag is also stabilizing, they said.

ICICI Securities advises investors "buy" the stock with a target price of Rs 580 a share. Credit Suisse maintained its "outperform" rating on MindTree and raised its target price to Rs 600 from Rs 500.

MindTree shares were up 8.1% at Rs 528.50 on NSE in afternoon trade.

Nachiket Kelkar

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