CSEC : Mindtree - Initiating Coverage

[RAJESH DESAI]

Dear All,

 

Focus on fewer verticals & domain expertise to drive growth

Mindtree Ltd. is a Global IT services and Product Engineering Services Company with rich domain expertise across specific domains. Backed by a solid management team, the company grew at a stupendous rate to cross $100 mn in revenues within 6 years and it is the first company to do so.

 

Strengthens focus on core IT business by adopting back to basics theme

As PES business is considered volatile and more vulnerable to macroeconomic shocks, Mindtree has renewed its focus on the core IT services business with strong focus on large deal wins. The management’s guidance for FY13 indicates that the PES segment would grow in the low single digits (0-5%) while IT business is expected to show decent traction (~15%) aided by growth in BFSI & manufacturing space.

 

Improved client mining and increased onsite revenues will act as key revenue drivers

The number of active clients has dropped from 261 in Q1 FY11 to 245 in Q1 FY13 as the company, has dropped around 50-60  low yielding clients in the recent quarters as they were not into segments that were strategic to Mindtree.

 

Scope for margin improvement in the presence of multiple levers

The management has given guidance for a stable margin despite the full impact of salary hike next quarter. Going forward, the key levers to improve operating margins include higher utilization rates, broadening the employee pyramid and improvement in operational efficiencies.

 

Inorganic growth strategy coupled with focus on non-linear revenues will propel long term growth

In the last 16 years, Mindtree has made several acquisitions, which helped them to strengthen their position in certain areas and foray into newer ones. Currently, Mindtree is also scouting for acquisitions worth $50 mn - $200 mn, and is looking at companies that provide infrastructure management services (IMS) or software package solutions.

 

Valuation:

At CMP of INR 649, the stock trades at P/E of 8.3x FY13 EPS and 7.7x FY14 EPS. We initiate coverage with an Outperformer rating and target price of INR 713 based on target P/E of 8.5x FY14 EPS.

 

Risks: Adverse cross currency movement can have a material impact on the projected revenues. Project ramp downs, sluggish growth in PES business and attrition at elevated levels are amongst the concerns.

 Regards,

CSEC Research

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CA. Rajesh Desai