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Monday, July 22, 2013

Maintain buy on Mindtree post Q1 FY13 results

The mid-tier software services exporter reported a better-than-expected 72% quarter-on-quarter jump in its first quarter net profit at Rs. 135cr, helped by new deal wins and foreign exchange gains. Revenue was up 6% QoQ at Rs. 648cr.

It has a nine-month target price of Rs. 1,095, an upside of 16.1% from its current market price of Rs. 943.

Brokerage summary follows...

Q1 FY14 dollar revenues for Mindtree were a positive surprise. Against our expectation of 2.5% qoq growth, the dollar revenues grew 4.2% qoq. This growth was largely volume backed with total volumes growing 4.1% sequentially. The pricing was largely stable with 0.4% qoq growth in dollar terms. The reported rupee revenues were up 5.8% to Rs6.5bn.

Among the key businesses, IT services continued to be the primary driver of the performance growing 5.4% qoq in dollar terms. The PE services on the other hand remained stable growing 1.1% qoq. The company has re-organised its primary business segments, these being Manufacturing, BFSI, Hitech, Travel and Others. Among these segments, the growth was led by Manufacturing and BFSI which grew 9.5% and 9.1% qoq in dollar terms. Among geographies, growth was largely driven by US which grew 5% in dollar terms. Within services, ADM (+9% qoq), IMS (+7.9% qoq) and testing (+6.5% qoq) drove the growth. Impressive client mining resulted in Top6-10/Non top 10 clients grew well at 6.2%/3.6% qoq in dollar terms. Its US$10mn+ clients also went up impressively from 9 last quarter to 10 currently.

The operating margin performance too was better than expected with OPM correcting only 60bps against our expectation of 120bps correction. The key headwinds of visa costs and strong employee hiring was offset by rupee depreciation and utilisation improvement (up to 74% from 71% last quarter). The revenue and OPM out-performance as well as materially better than expected other income (due to strong forex gains of Rs. 618mn) resulted in strong PAT growth 72% qoq (versus expectation of 17.5% qoq growth). The employee additions during the quarter were robust with net additions of ~700 employees (+6% of previous quarter base). Attrition too trended down to 12.4% from 13.4% last quarter.

Management’s qualitative guidance and commentary remained positive with an expectation of a better growth in FY14 than FY13. Improvement in outlook for PE services, continued traction/visibility in IT services space (driven by IMS) and overall improvement in spending behaviour of its client portfolio were the key reasons for the constructive commentary. On the margin front, weak rupee and margin levers like offshoring, utilization should help to maintain the OPM despite the headwinds of salary hikes and strong hiring. We increase our estimates to reflect out-performance and weaker rupee assumptions. We maintain BUY with 9-month TP of Rs1,095.