Accumulate MindTree; target of Rs 886: Aditya Birla Money

Aditya Birla Money is bullish on MindTree and has recommended accumulate rating on the stock with a target of Rs 886 in its February 8, 2013 research report.
 
“MindTree witnessed a decent $ term revenue growth of 2.5%, from $109.9 mn from $107.3 mn on sequential basis and an increase of 6.1% on YoY basis. Volume growth & rupee term revenue growth declined by 0.7% and 1% based on seasonal furloughs and unfavourable currency movements respectively. IT services continued to grow at an impressive rate of 4.8%, whereas Product Engg Services(PES) dipped by 2.6% (in $ terms QoQ). Travel & Transportation (8.5%) and Manufacturing (3%) led the vertical mix, whereas PES remained soft. On geographical basis, Europe witnessed a good traction of 5.6%, followed by 6.2% growth from RoW (in QoQ $ terms). EBITDA declined by 8.7% to Rs1209 mn from Rs 1319 mn (QoQ). EBITDA margin declined by 172 bps to 20.4%, due to increase in S&GA investments (20% vs 18% in Q213) and rupee appreciation 3.4%. The management is confident of maintaining the margins at the current levels. On YoY, EBITDA increased by 34.2% from Rs 897 mn. PAT increased by 36.8% to Rs 988 mn from Rs 722 mn (QoQ) and soared by 63% on YoY basis.”
 
“Q3 revenues were largely in-line with our estimates, except bottom-line. We revise our earnings upwards by 7.5% & 2.4% for FY13E & FY14E to factor in better than expected profit numbers. Management insisted a positive outlook on revival in discretionary spending across industries in the upcoming quarters. On CY13 budget front, MT’s Top 30 clients painted largely stable budget, except for one client expecting cut in budget. Early signs show that, FY14 growth should be better than FY13. MT’s increase in sales force investments augurs well, considering MT’s large chunk of revenues depends upon discretionary side and early signs of revival. We believe MT still has levers to support the margins from the current levels.”
 
“Currently, MT trades at a P/E of 9.4x and 8.7x on its FY13E & FY14E EPS of Rs83.7 & Rs90.4 respectively. We reiterate our positive stance on the company based upon a) impressive IT service CAGR growth rate (5.8% Q110-Q313), b) stabilising operating margin (improved from 11.1% in Q112 to above 20% in Q313, expect to maintain at current levels, thanks to available operating levers) and c) signs of discretionary spending coming back (PES contributes ~30% of sales). Based upon these factors we upgrade and value MT at 9x on its one-year forward earnings with revised target price of Rs 885.5 and reiterate our Accumulate rating,” says Aditya Birla Money research report.

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