MindTree Consulting (MindTree), promoted by a group of 10 professionals (lead by Ashok Soota, CMD), is an international technology company that delivers business and technology solutions through global software development. MindTree currently has three development centers: one each in Bangalore, Chennai, and New Jersey in the US. It is planning to develop a new facility in Bhubaneshwar, India, which is to be completed in FY2008.
End December 2006, MindTree had 18 sales offices across the globe with a sales force of 46 and headcount of 4006. There were 153 active clients. Of these, 30 were million-dollar customers. From these, four clients accounted for revenue in excess of US$ 5 million. The US region accounted for 62.7% of the revenue share, Europe 23% and Asia Pacific Countries 14.3%. The top client contributed 9.9%, top five 32.2% and top10 45.2% of the revenue.
MindTree has two divisions: Information Technologies Services (IT Services) contributed 76%, and Research and Development Services (R&D Services) 24% of the total revenue in the nine months ended December 2006. IT Services has strong focus on manufacturing (30.1%), travel and transportation (22.6%), banking financial services and insurance (BFSI) (17%) and hi-technology (18.5%). R&D Services, including engineering and research, enable faster product realisation by leveraging the expertise in hardware design, embedded software, middleware and testing and through MindTree’s IP building blocks in Bluetooth, VOIP, IVP6, iSCSI and others in computing.
In September 2004, MindTree took over the software divisions of ASAP Solutions and its subsidiary Arachno Solutions, providing SAP implementation and maintenance, data management and customised application development in Asia and the US. In June 2005, it snapped Linc Software Services in the business of application development and maintenance, ERP product support and web development. In January 2007, MindTree signed a no-binding term sheet to acquire an IC design company for all-cash consideration.
The proceeds of the issue are to be utilised to fund the new Rs 120.74-crore development centre in Chennai, and prepayment of Rs 18.77-crore loans.
Strengths
- In FY 2006, the R&D Services earned export revenue of approximately US$ 3.9 billion, comprising about 22% of the overall IT services and software exports. The Nasscom Strategic Review 2006 has projected the estimated US $27-million outsourced product-engineering services globally to increase by 100% over the next four to five years.
- Between FY 2004 to FY 2006, revenue registered a CAGR of 85.5% with operating profit margin (OPM) improving from 3.9% in FY 2004 to 17.3% in FY 2006. Net profit reported a CAGR of 500%. The FY 2006 net profit has been surpassed in the nine months ended December 2006, and there has been a 110 basis-point improvement to 17.3% in OPM. The management believes there is scope for improvement in margin on better utilisation and flattening of employee pyramid from the current average experience of 4.6 years.
- With domain knowledge in R&D services. MindTree has positioned itself as a comprehensive solutions provider. The company has the capability to create opportunities to cross-sell its R&D engineering services to its clients and also supplement its IT services capabilities.
- MindTree has a management team of professionals with an average of 20 years’ industry experience with different areas of specialisation within the IT industry. The co-founders are from leading IT consulting companies Wipro, Cambridge Technology Partners and Lucent Technologies.
Weaknesses
- The revenue may vary significantly from quarter to quarter as the revenue is project based and there can be variations in the duration, size and scope of projects.
- Options convertible into similar number of shares issued under the employee stock option plan (ESOP) and director stock option plan DSOP total 26,53,977. If exercised, the shares will amount to 7% of the post-issue equity.
Valuation
The annualised EPS for the nine months ended December 2006 works out to Rs 23.4. At the price band of Rs 365-425, PE is 15.6–18.1. The TTM PE of Computers – Software Medium/Small is 25.7.