Mindtree, 25th January

7/29/2019 Mindtree, 25th January

1/13

Please refer to important disclosures at the end of this report 1

EBITDA 120 132 (8.8) 90 34.3

EBITDA margin (%) 20.4 22.1 (172)bp 17.3 315bp

Source:Company, Angel Research

MindTree reported broadly in-line set of results for 3QFY2013 with profit ahead of

our estimates, aided by higher other income. The volume growth was muted at -0.7%.

But on the positive side the company has been able to inch up its price realization by

2.6% qoq. MindTree has been one of the good performers on the revenue as well as

margin front in the Indian IT mid-cap space, posting a 3.5% CQGR in its revenueover the past eight quarters.

: For 3QFY2013, MindTree reported USD revenue of

US$109.9mn, on the back of 2.6% qoq improvement in blended realization. The

EBITDA and EBIT margin of the company declined by 172bp and 162bp qoq to

20.4% and 17.8%, respectively. This was due to increase in SG&A expenses as a

percentage of sales by 140bp qoq to 20%, as the company increased its

investments on the front end citing growth revival. The PAT came in at `99cr, up

36.8% qoq, largely led by higher-than-expected other income of `21cr as against

`34cr loss in 2QFY2013.

MindTrees Management indicated that it remains hopeful

of FY2014 turning out to a better revenue growth year as compared to FY2013

because of pick up in client spending (backed by a positive survey of its ~50 top

clients) as well as a result of companys greater concentration on mining its focus

clients. Even within the PES segment, the company cited better prospects in

FY2014 as against in FY2013. Within PES, growth outlook in the ISV and semi-

conductors space is sanguine, while the segments still under some stress are

consumer and communications. MindTree is currently chasing eight large deals of

+US$25mn TCV and expects few of them to get closed in the next couple of

quarters. Overall, we expect the company to record a 9.3% and 16.4% CAGR in

USD and INR revenue, respectively, over FY2012-14E. We expect the company to

record a 30.3% CAGR in its EBITDA and 27.1% CAGR in PAT over FY2012-14E.

% chg 4.7 16.4 26.9 23.1 9.5

% chg 310.8 (52.6) 114.6 59.9 3.1

EBITDA margin (%) 18.9 11.8 15.3 21.0 19.3

P/E (x) 14.5 31.7 14.7 9.4 9.1

P/BV (x) 4.7 4.2 3.4 2.5 1.9

RoE (%) 32.0 13.1 22.8 26.8 21.7

RoCE (%) 26.8 13.3 22.2 31.9 25.1

EV/Sales (x) 2.3 2.0 1.5 1.1 0.9

EV/EBITDA (x) 12.4 17.2 9.9 5.2 4.7

Source: Company, Angel Research

CMP `790

Target Price `868

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (464)

Bloomberg Code

Shareholding Pattern (%)

Promoters 19.3

MF / Banks / Indian Fls 8.8

FII / NRIs / OCBs 25.9Indian Public / Others 46.0

Abs. (%) 3m 1yr 3yr

Sensex 7.0 19.5 18.8

Mindtree 18.6 78.7 23.5

MTCL@IN

20,027

6,054

MINT.BO

44,818

BSE Sensex

Nifty

Reuters Code

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

3,214

0.5

10

814/372

+91 22 39357800 Ext: 6819

[email protected]

Performance highlights

3QFY2013 Result Update | IT

January 23, 2013


2/13

Mindtree | 3QFY2013 Result Update

January 23, 2013 2

Exhibit 1:3QFY2013 performance (Indian GAAP, Consolidated)

Cost of revenue 352 357 (1.5) 332 5.9 1,053 930 13.2Gross profit 238 239 (0.4) 188 27.0 697 459 51.6

SG&A expenses 118 107 9.9 98 20.4 327 265 23.3

Depreciation 15 16 (5.0) 17 (12.7) 47 53 (11.0)

EBIT 105 116 (9.3) 72 45.5 323 142 127.8

Interest expense 0 0 0 1 0

Other income 21 (34) 1 1 37

PBT 126 82 54.9 73 72.2 323 179 80.4

Income tax 28 9 195.7 13 114.8 63 29 113.6

PAT 99 72 36.8 61 63.2 260 150 73.9

Minority interest - - - - - - - -

Share in profit of associates - - - - - - - -

EPS 23.8 17.4 36.5 14.9 59.6 62.8 36.9 70.3

Gross margin (%) 40.4 40.1 26bp 36.1 429bp 39.8 33.1 675bp

EBITDA margin (%) 20.4 22.1 (172)bp 17.3 315bp 21.1 14.0 714bp

EBIT margin (%) 17.8 19.5 (162)bp 13.9 392bp 18.5 10.2 825bp

PAT margin (%) 16.2 12.8 331bp 11.6 453bp 14.9 10.5 438bp


Exhibit 2:Actual vs Angel estimates

Net revenue 590 593 (0.5)

EBITDA margin (%) 20.4 21.0 (55)bp

PAT 99 75 31.2


Modest performance

For 3QFY2013, MindTree reported USD revenue growth of 2.5% qoq to

US$109.9mn, on the back of uptick in realizations while volumes declined.

Blended realization improved 2.6% qoq, driven by 2.1% qoq improvement onsite

and 3% qoq improvement offshore. The volume however declined by 0.7% qoq

which was disappointing. The Management indicated that volumes suffered during

the quarter largely because of seasonality, adjusting for which, volumes would

have grown by 1.8% qoq. Better productivity during the quarter was a function of

driving greater efficiencies in fixed price contracts, revenue contribution from which

increased by 350bp qoq to 42.3%. In INR terms, revenue came in at `590cr, down

1.0% qoq.


3/13


January 23, 2013 3

Exhibit 3:Trend in revenue growth (qoq)


Service vertical wise, the companys growth was led by traditional IT service

offerings application development (contributed 25.6% to revenue) and

application maintenance (contributed 21.7% to revenue), the revenues of which

grew by 3.7% and 3.4% qoq, respectively. Infrastructure Management Services

(IMS; contributed 13.1% to revenue) continued its growth traction with revenues

growing by 4.9% qoq; over the last 12 quarters, this service has grown at a CQGR

of ~15%. Revenues from package implementation also grew by a whopping

55.6% qoq. However, revenue growth from engineering services and consulting

declined by 10.9% and 8.9% qoq, respectively.

Exhibit 4:Growth trend in service verticals

Development 25.6 3.7 20.6

Engineering 13.3 (10.9) (25.0)

Maintenance 21.7 3.4 5.5

Consulting 3.2 (8.9) (15.2)

Package implementation 4.1 55.6 (13.1)

IP led revenue 1.3 2.5 6.0

Independent testing 17.7 2.5 15.1

Infrastructure mgmt. and tech. support (IMS) 13.1 4.9 33.5


Industry wise, revenue from total IT services (ITS) during the quarter grew by 4.7%

qoq to US$77mn. In ITS, the major growth driver was travel and transportation

industry segment, the revenue of which grew by 8.5% qoq. This segment has

grown at a CQGR of 14.4% over the past four quarters, well above the companys

overall growth. Revenues from banking, financial services & insurance (BFSI), and

manufacturing & retail also grew by 1.6% and 3.0% qoq, respectively. The

revenues from product engineering services (PES) declined by 2.7% qoq.

103.7105.0 105.5

107.3

109.9

2.3

1.3

0.4

1.7

2.5

0

1

1

2

2

3

3

90

95

100

105

110

115

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

(%)

(US$mn)

Revenue (US$ mn) qoq growth (%)


4/13


January 23, 2013 4

Exhibit 5:Growth trend in industry segments

ITS

Manufacturing and retail 18.9 3.0 12.6 BFSI 22.8 1.6 15.7

Travel, media and services 19.9 8.5 5.5

Others 8.4 8.9 8.6

PES 29.9 (2.7) (4.2)


Geography wise, revenues from developing countries (Rest of the World) grew by

21.1% qoq, after three weak quarters. Europe and India grew impressively by

5.6% and 7.6% qoq, respectively. US lagged during the quarter, revenues from

which declined by 1.6% qoq. Europe has been the key growth driver for the

company over the past four quarters.

Exhibit 6:Growth trend in geographies

U.S. 55.8 (1.6) 5.3

Europe 30.2 5.6 13.9

India 6.3 7.6 (7.2)

Rest of World 7.8 21.1 (2.7)


Hiring and utilization

During 3QFY2013, gross additions at MindTree stood at 443; while on a net level

69 employees got added into the system, taking the total employee base to

10,952. The attrition rate (last twelve month [LTM] basis) during the quarter

decreased to 15.1% in 3QFY2013 from 16.3% in 2QFY2013.

Exhibit 7:Employee metrics

Software professionals 10,268 10,330 10,173 10,226 10,280

Sales and support 666 670 657 657 672

Total employee base 10,934 11,000 10,830 10,883 10,952Gross addition 846 502 272 454 443

Net addition 354 66 (170) 53 69

Attrition LTM (%) 19.4 18.2 17.0 16.3 15.1


Utilization level, including trainees, declined slightly by 30bp qoq to 71.4% due to

healthy employee gross additions into the system.


5/13


January 23, 2013 5

Exhibit 8:Utilization trend


Margin declines

For 3QFY2013, MindTrees EBITDA and EBIT margins declined by 172bp and

162bp qoq to 20.4% and 17.8%, respectively. This was due to increase in SG&A

expenses as a percentage of sales by 140bp qoq to 20%, as the company

increased its investments on the front end citing growth revival.

Exhibit 9:Margin profile


The PAT came in at `99cr, up 36.8% qoq, largely led by higher than expected

other income of `21cr as against `34cr loss in 2QFY2013.

Client pyramid

MindTree added eight new clients during 3QFY2013. The company saw addition

of one client in US$10mn plus revenue bracket and addition of three clients in

US$5mn-10mn revenue bracket. The revenue from top 5 and top 10 clients grew

by 2.5% and 3.1% qoq, respectively.

68.367.8

68.9

71.7 71.4

75.8

72.171.5

72.373.1

66

68

70

72

74

76

78


(%)

Uti li zation - incl . trainees Uti li zation -excl . trainees

36.1

39.5 38.9 40.140.4

17.318.7

20.9 22.1 20.4

13.915.5

18.019.5 17.8

5

10

15

20

25

30

35

40

45


(%)

Gross margin EBITDA margin EBIT margin


6/13


January 23, 2013 6

Exhibit 10:Client metrics

Active clients 258 237 245 247 245

New clients added 9 6 19 11 8US$1mn-5mn 58 60 61 56 49

US$5mn-10mn 9 10 9 9 12

US$10mn plus 7 7 8 8 9


Outlook and valuation

MindTrees Management indicated that it remains hopeful of FY2014 turning out

to be a better revenue growth year as compared to FY2013 because of pick up in

client spending (backed by a positive survey of its top clients) as well as a result of

companys greater concentration on mining its focus clients. Also it expectsincreased sales investments that the company has been making through FY2013

to meet some success and contribute to sales. The company has invested into more

hunting resources in US and Europe in anticipation of more business on account of

the above. Even within the PES segment, the company cited better prospects in

FY2014 as against in FY2013. Within PES, growth outlook in the ISV and semi-

conductors space is sanguine, while the segments still under some stress are

consumer and communications.

For 4QFY2013, the company has guided for a revenue growth comparable to that

in 3QFY2013 and a stable margin performance. However, pricing is expected to

remain stable and the growth is likely to be driven by volumes. The Management isconfident that its IT services business would continue with the momentum and has

given offers to 1,000 campus graduates for FY2014. This would help MindTree to

rationalize its employee pyramid and cushion its margins. The company has

recently set up a team to chase large deals. The Management indicated that large

deal closures are happening but at a slower rate. MindTree is currently chasing

eight large deals of +US$25mn TCV and expects few of them to get closed in the

next couple of quarters. Overall, we expect the company to record a 9.3% and

16.4% CAGR in USD and INR revenue, respectively, over FY2012-14E.

MindTree had been able to improve its margins in the last six quarters by cutting

down SG&A expenses and deriving benefits from INR depreciation. During3QFY2013, because of increase in SG&A expenses, the companys operating

margins declined sequentially. The move of rationalizing the employee pyramid

has helped the company shift it significantly, with employees having less than three

years of experience currently standing at ~36% as a percentage of total employees

as against 30% at the start of FY2012. We believe MindTree can further broaden

its employee pyramid base by expanding it to 45-50%. We expect the company to

record a 30.3% CAGR in its EBITDA and 27.1% CAGR in PAT over FY2012-14E.

At the current market price of `790, the stock is trading at 9.1x FY2014E EPS of

`86.8.


7/13


January 23, 2013 7

Exhibit 11:Key assumptions

Revenue growth-USD terms (%) 8.1 9.8

USD-INR rate 54.2 54.0Revenue growth-INR terms (%) 23.1 9.5

EBITDA margin (%) 21.0 19.3

Tax rate (%) 20.3 22.0

EPS growth (%) 57.1 2.9


Exhibit 12:Change in estimates

Net revenue 2,339 2,357 0.7 2,502 2,580 3.1

EBITDA 488 494 1.2 459 497 8.3

PBT 394 438 11.3 428 462 7.8

Tax 83 89 7.4 107 102 (5.2)

PAT 311 349 12.3 321 360 12.1


Exhibit 13:One-year forward PE(x) chart


0

200

400

600

800

1000

1200

1400

1600

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

(`)

Price 24x 19x 14x 9x 4x


8/13


January 23, 2013 8

Exhibit 14:Recommendation summary

HCL Tech Accumulate 677 765 13.1 20.7 12.8 13.6 1.5 22.9Hexaware Buy 86 118 37.4 19.0 8.0 6.3 0.9 22.0

Infosys Neutral 2,813 - - 28.8 16.3 5.9 2.9 21.3

Infotech Entp. Neutral 176 - - 17.4 9.1 10.3 0.6 13.6

KPIT Cummins Accumulate 113 130 14.6 15.9 8.7 17.5 0.8 20.9

Mahindra Satyam Neutral 117 - - 19.3 10.8 2.1 1.2 23.5

Mphasis Accumulate 374 396 5.7 17.5 9.9 0.0 0.8 13.5

NIIT^ Buy 27 36 33.3 10.9 4.4 (2.7) 0.2 14.1

Persistent Neutral 579 - - 25.2 10.7 15.0 1.3 17.9

TCS Accumulate 1,312 1,465 11.7 28.9 16.6 13.3 3.4 29.7

Tech Mahindra Accumulate 967 1,087 12.5 19.0 9.1 6.5 1.7 21.6

Wipro Accumulate 401 429 7.1 19.4 14.5 6.8 1.7 17.9

Source: Company, Angel Research; Note: Valued on SOTP basis


9/13


January 23, 2013 9

Profit and loss statement (Indian GAAP, Consolidated)

S/w development exp. 798 1,015 1,248 1,414 1,587

% of net sales 61.6 67.2 65.2 60.0 61.5

Gross profit 498 495 667 943 993

% of net sales 38.4 32.8 34.8 40.0 38.5

SG&A expenses 252 317 374 448 495

% of net sales 19.5 21.0 19.5 19.0 19.2

% of net sales 18.9 11.8 15.3 21.0 19.3

Depreciation 65 71 70 63 70

EBIT 180 107 223 431 428

Interest expense, net 3 0 0 1 0

Other income, net 77 24 38 8 34

Profit before tax 255 131 261 438 462

Provision for tax 40 29 43 89 102

% of PBT 15.6 22.1 16.4 20.3 22.0

Minority interest - - - - -

Share in profit of associates - - - - -

EPS (`) 54.4 24.9 53.7 84.4 86.8


10/13


January 23, 2013 10

Balance sheet (Indian GAAP, Consolidated)

Share capital 40 40 41 41 41

Application money - - - - -

Reserves and surplus 631 736 917 1,261 1,617

Minority interest - - - - -

Secured loans - 4 4 4 4

Unsecured loans 3 - 41 41 41

- 21 3 3 3

Gross block - fixed asst. 515 562 590 690 810

Acc. depreciation 253 262 331 395 464

Net block 261 301 259 296 346

Capital WIP 25 0 9 9 9

Goodwill 15 - - - -

Investments 127 1 1 1 1

Deferred tax assets, net 21 22 32 32 32

Loans and advances - 42 54 59 64

Other non-current assets - 11 26 26 26

Sundry debtors 237 283 408 426 466

Cash and bank balance 52 46 60 300 521

Investments 195 111 308 379 413

Other current assets - 200 179 148 191

Total current assets 484 639 954 1,253 1,591

Current liabilities 211 161 257 236 265

Provisions 49 53 72 90 98

625 927 1,227


11/13


January 23, 2013 11

Cash flow statement (Indian GAAP, Consolidated)

Pre-tax profit from operations 178 106 223 430 427

Depreciation 65 71 70 63 70

Pre tax cash from operations 243 178 293 493 497

Other income/prior period ad 77 24 38 8 34

Net cash from operations 320 202 331 501 531

Tax 40 29 43 89 102

(Inc)/dec in

Current assets (11) (161) (301) (60) (116)

Current liabilities (48) (47) 116 (4) 37

Net trade working capital (59) (208) (185) (63) (79)

(Inc)/dec in fixed assets (55) (86) (36) (100) (120)

(Inc)/dec in investments (26) 127 - - -

(Inc)/dec in deferred tax assets (2) (0) (10) - -

(Inc)/dec in intangibles 131 15 - - -

(Inc)/dec in other assets (33) (32) (45) (5) (5)

Inc/(dec) in debt (136) 1 40 - -

Inc/(dec) in equity/premium (82) 15 (33) - -

Dividends (14) (12) (5) (5) (5)

Cash at start of the year 49 52 46 60 300

Cash at end of the year 52 46 60 300 521


12/13


January 23, 2013 12

Key ratios

P/E (on FDEPS) 14.5 31.7 14.7 9.4 9.1

P/CEPS 11.1 18.7 11.2 7.8 7.5

P/BVPS 4.7 4.2 3.4 2.5 1.9

Dividend yield (%) 1.5 1.3 0.5 0.5 0.5

EV/Sales 2.3 2.0 1.5 1.1 0.9

EV/EBITDA 12.4 17.2 9.9 5.2 4.7

EV/Total assets 4.5 3.8 2.9 1.9 1.4

EPS 54.4 24.9 53.7 84.4 86.8

Cash EPS 70.9 42.3 70.8 101.4 105.6

Dividend 11.8 10.0 4.0 4.0 4.0

Book value 170 190 235 320 407

Tax retention ratio (PAT/PBT) 0.8 0.8 0.8 0.8 0.8

Cost of debt (PBT/EBIT) 1.4 1.2 1.2 1.0 1.1

EBIT margin (EBIT/Sales) 0.1 0.1 0.1 0.2 0.2

Asset turnover ratio (Sales/Assets) 1.9 1.9 1.9 1.7 1.5

Leverage ratio (Assets/Equity) 1.0 1.0 1.0 1.0 1.0

Operating ROE 32.0 13.1 22.8 26.8 21.7

RoCE (pre-tax) 26.8 13.3 22.2 31.9 25.1

Angel RoIC 39.7 14.1 23.9 41.4 36.4RoE 32.0 13.1 22.8 26.8 21.7

Asset turnover (fixed assets) 4.5 5.0 7.2 7.7 7.3

Receivables days 73 63 66 66 66

Payable days 114 67 61 61 61


13/13


J 23 2013 13

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement MindTree

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Mindtree, 25th January

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Transcript of Mindtree, 25th January