MindTree Consulting Ltd.

Issue details

Bid/Issue opens: Feb 09, 2007
Bid/Issue closes: Feb 14, 2007
Issue Size: 5,593.300 equity share of Rs 10 each
Reservation for employees, business associates: 652,560 equity shares of Rs 10 each
Net Issue: 4,940,740 equity shares of Rs 10 each
Price Band: Rs 365-425
Minimum application: 15 shares and in multiples of 15 shares thereof
Maximum Retail Bid Amount: Rs 100,000

Capital Structure

Authorised Capital: 796,200,00 shares of Rs 10 each
Equity shares outstanding prior to issue: 316,952,370
Equity shares outstanding after the issue: 372,885,370
Background

MindTree Consulting was promoted by Ashok Soota (president of Wipro Infotech from 1984 to 1999) and nine other industry professionals in 1999. The company is involved in IT Services and R&D. It has a comprehensive range of offerings spanning IT strategic consulting, application maintenance, package implementation, product engineering, testing, data warehousing, infrastructure management and business intelligence. In the R&D space, MindTree offers R&D outsourcing services and also does its own in-house research through which it has developed intellectual propriety (IP) in the short-range wireless communication segment. The company customises and licenses these IPs to clients. The company derived 76.5% of its revenues from IT services and 23.5% from R&D services. MindTree’s major customers include Fortune 10 companies like American International Group and Fortune 100 companies like United Technologies Corporation in addition to Uniliver, Volvo, Avis Budget Group, LSI Logic and Symantec.

Objectives of the issue

1. To fund new development center in Chennai.

2. Pre-pay certain loans

Key Investment Rationale

Strong management team
MindTree benefits from a strong management team led by Ashok Soota. The team has an average experience of 20 years in the industry with different areas of specialisation.

End-to-end mid-size IT services player
MindTree has positioned itself as a global mid-size IT services company providing services spanning IT strategic consulting, application maintenance, package implementation, product engineering, testing, data warehousing, infrastructure management and business intelligence. The mid-size positioning gives it a unique advantage, as it is able to provide a higher degree of attention to its customers as compared to larger players.

R&D services – a key source of strength
The company derived 23.5% of its annual revenues from its R&D division in FY06. The R&D business has two divisions – engineering and research. The engineering division provides R&D outsourcing services like product architecture & design, product re-engineering and product assurance, while the research division conceives and develops MindTree’s own intellectual properties primarily in the short-range wireless communication segment. The company has a Bluetooth wireless technology IP portfolio that it has licensed to a large handset OEM. The company is now developing IPs in the Ultra Wide Band Technology space, which has immense scope considering that it is a high speed Bluetooth technology. We believe that this business will lay the pillars for a back-ended revenue model.

Consultancy – moving up the value chain
The company has positioned itself as an IT solutions provider rather than a mere IT services provider. Larger companies in the IT space are now gradually foraying into consultancy. MindTree positioned itself as a consultant right from day one with business transformation initiatives. We believe that this would augur well for the company as it pursues a high growth path.

To acquire a semiconductor design firm
The company plans to acquire a domestic semi-conductor design company for which it has already signed a non-binding term agreement. The acquisition would help strengthen its R&D services business.

Human resource management looks top notch

The company’s ability to retain and nurture talent looks top notch with attrition rates at 12% comparable to larger peers. The company employed 3,128 people as on March 31, 2006.

Key Concerns

* The company develops IP in the short-range wireless technology space. The company could be subject to third-part claims asserting infringement.

Financials

Revenue grew at a CAGR of 50% during FY04-FY06 to Rs 455.37 crore in FY06. EBIDTA margins have also grown from 7.8% in FY04 to 19.3% in FY06. The company recorded a net profit margin of 12% to record profits of Rs 53.8 crore in FY06. Net profits grew by 219% in FY06 over FY05. On an annualised basis for the reported nine months ended FY07 the company is likely to record a 62% net profit growth to Rs 87.3 crore. The company is likely to post a RoNW of 22% at the lower band and 20% at the upper band based on the annualised earnings of the nine months ended FY07E earnings.

Valuations

At the issue price of Rs 365 to Rs 425, the stock discounts its FY07E annualised earnings of Rs 23.4 earnings on post-issue diluted basis by 15.6x at the lower band and 18.1x at the upper band. We believe the valuations are reasonable for a company that is likely to post a 62% earnings growth based on nine-month FY07E annualised earnings. Investors can subscribe to this issue for listing gains and for the long-term.