Mindtree

Mindtree

Mindtree Ltd

Investments with a one-two year perspective can be considered in the shares of MindTree, considering its relatively strong business positioning among mid-tier IT companies and reasonable valuations.

Given the current difficult macro-environment where clients tighten IT spends and demand more value for money, MindTree may be one of the best-placed players in the mid-tier segment to weather the crisis. The company’s focus on applications delivery to the key areas of operations of the various verticals that it operates in, lends confidence in the current difficult macro-environment.

At Rs 234, the stock trades at seven times its likely 2008-09 earnings. This is at a slight premium to mid-tier players such as Hexaware Technologies and KPIT Cummins.

But MindTree’s blended offering of IT and R&D services, better revenue visibility on a wider vertical-mix, and an increasing domestic presence, may justify this premium. MindTree resembles any of the top-tier IT players in terms of service offering, but operates on a smaller scale. This apart, improvements in several key operating metrics and opportunities in areas such as testing, after the Aztecsoft acquisition, are positives for the company over the long run.
vertical-mix

MindTree offers both IT and R&D services, catering to a wide range of clientele. Traditional services such as application development and maintenance (ADM), package implementation, testing and the like are delivered to clients across four-five verticals. MindTree also works on product-realisation services with clients who produce storage and server systems, consumer appliances, communication systems and automotive systems.

This mix of IT-R&D services is around 80:20 in terms of revenue contributions to the company. Over the long run, R&D services have the potential to lead to IP-led revenues that are not linked to the manpower added and, therefore, may provide scope for margin expansion.

In terms of vertical-mix, MindTree is also favourably placed, given the current problems in the financial sector. Manufacturing contributes 27 per cent of the revenues, BFSI (26.4 per cent) and travel and transportation (20.4 per cent); clients are other important contributors. For instance, in the manufacturing segment, MindTree works in areas such as distribution planning and sales routing, business intelligence, and trade promotion data management to give feedback to product managers. In the BFSI, the company is quite selective in the way it operates.

ADM services contribute nearly 75 per cent of its revenues. Though these command lower billing rates, they are non-discretionary in nature.

Gains from acquisition

This means that IT-budget tightening of clients poses less of a threat to project flows. Together, these factors lend better revenue visibility over the medium term for the company.

MindTree has also looked to grow inorganically and has acquired a 79.9 per cent stake in Aztecsoft at an enterprise value of Rs 360 crore. MindTree is funding over 50 per cent of this deal through internal accruals.

Aztecsoft works with clients in niche areas such as transaction portals, intranet and extranet portals of enterprises, independent software vendors and mobile and wireless companies. It counts Microsoft and AOL as its clients.

Aztecsoft has enterprise software capabilities in these segments and has capabilities in key technology areas such as SaaS, Web 2.0 and cloud computing. MindTree’s R&D division together with Aztecsoft’s capabilities would now be able to address the entire value chain of product development business.

Aztecsoft has a strong independent testing service practice, which is slated to be a key growth area of outsourcing, according to Nasscom reports.
India Presence

HUL, ICICI Bank, ING Vysya and Titan Industries are some of MindTree’s major clients in India. Over the past year, MindTree has been pursuing deals in the government and Defence segments.

It has also participated in the e-governance initiative, with a large project for the Rajasthan Government for citizen services.

Other assignments include work done for the Chief of Army Staff and the Deputy Chief of Army Staff and a consulting assignment to manage the logistics of a war.

India contributes around five per cent of Mindtree’s overall revenues and the company hopes to enhance this. The company is eyeing more such deals and gain from government spends on IT enablement.
Improving operating metrics

Over the last few quarters, the company has enhanced several operating metrics to optimise costs and manage margins.

Utilisation, which was at 65 per cent levels, is now 70.5 per cent and MindTree hopes to increase this over the next year or so. In terms of revenue-mix, the offshore component is over 70 per cent.

This makes MindTree a player with one of the best mix among mid-tier IT players.

A better offshore component ensures better margins (but lower revenues) compared to onsite where revenues come at lower margins. Million dollar client additions are healthy.

Repeat business at 99 per cent is comparable to top-tier IT players and indicates that there is no significant reduction in engagement with existing clients.

Attrition has also come down significantly to 15 per cent from 16.3 per cent.
Risks

There is a possibility of clients coming back for price reductions for deals, which may hurt realisations.

With several large companies in the BFSI space filing for bankruptcy, and with automotive companies also facing the heat, the overall pie of newer deals may be reduced for MindTree.

India Economy, Idea Cellular, Canara Bank, Titan Industries, Petronet LNG, HT Media, Shree Cement, Mindtree Consulting, Federal Bank, India Banks

India Economy, Idea Cellular, Canara Bank, Titan Industries, Petronet LNG, HT Media, Shree Cement, Mindtree Consulting, Federal Bank, India Banks

Your Ad Here

TCS, HDFC, PFC, Concor, Jubilant Organosys, Mindtree Consulting, GAIL, BGR Energy, India Technology

TCS, HDFC, PFC, Concor, Jubilant Organosys, Mindtree Consulting, GAIL, BGR Energy, India Technology

Mindtree

Mindtree

Company Background - Mindtree Ltd

The company was incorporated as MindTree Consulting Private Limited on August 5, 1999 by a group of ten individual promoters of which three of them invested through an entity incorporated in Mauritius. The company is an international IT consulting company that delivers affordable business and technology solutions through global software development. Co-headquartered in Somerset, New Jersey and Bangalore, India, the company's seasoned management team and employees skilled in technology, business analysis and project management approach technology initiatives in a business context. The company also delivers product-development services and designs reusable building blocks for high-tech companies. The company is also present in California, Illinois, New Jersey, Virginia and Colorado in the U.S., United Kingdom, Germany, Singapore, Japan, Middle East, Australia, Switzerland and Sweden. The company has structured into two business units that focus on software development - IT Services and R&D Services. The company have clients that range from Fortune 10 companies to enterprise software organizations.

In September 2004, the company has acquired the software divisions of ASAP Solutions Private Limited ('ASAP') and Arachno Solutions Private Limited ('ARSPL'). ARSPL is a wholly owned subsidiary of ASAP, and both companies were engaged in, inter alia, providing information technology services, specifically SAP implementation and maintenance, data management and customized application development in Asia and USA. The company has acquired the software business of ASAP Solutions Inc., the wholly owned subsidiary of ASAP through a concurrently operating agreement.

In June 2005, The company has acquired 100% share capital of Linc Software Services Private Limited engaged in the business of application development and maintenance, ERP product support and webdevelopment. By virtue of the acquisition, Linc Software Services Private Limited, subsequently renamed as MindTree Software Services Private Limited, became subsidiary of MCL. Further, by a scheme of arrangement as approved by the High Court of Karnataka dated July 28, 2006, MindTree Software Services Private Limited was merged with MCL w.e.f April 1, 2005.

February 2007, the company has entered into capital market. The company has issued 55,93,300 Equity shares to the public. Issue price is Rs.425/- per share.

Mindtree

Mindtree

India Strategy, Pharma, Hindustan Zinc, Sun TV, Union Bank of India, Corporation Bank, Mindtree Consulting, Polaris Software, Real Estate

India Strategy, Pharma, Hindustan Zinc, Sun TV, Union Bank of India, Corporation Bank, Mindtree Consulting, Polaris Software, Real Estate

Mindtree Consulting

Mindtree Consulting

Mindtree Consulting

Mindtree Consulting

Mindtree eyes acquistion

Mindtree may acquire a European company

IPO funds may be used for acquistion

UTV, Cadila, Peninsula Land, Nicholas Piramal - BUY; Bank of Maharashtra - HOLD; MindTree - SELL

UTV, Cadila, Peninsula Land, Nicholas Piramal - BUY; Bank of Maharashtra - HOLD; MindTree - SELL

MindTree Consulting - Q2FY08 Result Update 26Oct07

MindTree Consulting - Q2FY08 Result Update 26Oct07

Satyam, Zee, Ashok Leyland, Shree Cement, Godrej, Glaxo, Mindtree, Suzlon, Economy

Satyam, Zee, Ashok Leyland, Shree Cement, Godrej, Glaxo, Mindtree, Suzlon, Economy

Mindtree Consulting

Mindtree Consulting

Hot Picks

Tanla Solutions CMP: Rs 482.65 Target price: Rs 706 HDFC Securities has initiated coverage on Tanla Solutions with a ‘buy’ recommendation on account of the company’s presence in the mobile transaction business. According to the brokerage, Tanla Solutions’ revenue is estimated to grow at a CAGR of 72% between FY07 and FY09. “Servicing content providers will help Tanla to catch up with the rapid technological changes in the content delivery business. This is a major business for Tanla and helps it to get more content providers on its network,” says the report. Moreover, the company is expected to spend Rs 220 million in FY08 on R&D. “We believe that the company would grow at a CAGR of 59% in FY07-09E at net levels. This gives us a target price of Rs 706 for the stock --Rs 646 for the core business and Rs 60 for its non-core business (interest and dividend incomes),” said the brokerage in a note to its client. Spice Comm CMP: Rs 55 Target price: Rs 70 Citigroup has initiated coverage on Spice Communications with a ‘buy’ recommendation as the telecom entity is in the process of ramping up coverage in Punjab and Karnataka. “Moreover, we believe its suitability as an M&A target provides the icing on the cake,” adds the report. Access to 900 MHz and its small footprint make it an attractive and probably the only M&A candidate, explains the foreign brokerage. “New spectrum rules may dilute M&A prospects a bit, but on the flip side provides a chance to enter new circles, though constrained by size and management bandwidth,” it adds. However, the report adds that while new circle rollouts are possible if new spectrum norms are accepted by the department of telecom (DoT), Spice will remain constrained by its balance sheet size as well as management bandwidth. Citigroup has set a 12-month price target at Rs 70 per share. Incidentally, the price target includes a 15% M&A premium. We believe that the scope for merger/acquisition between Spice and other telcos such as Idea, RCOM and Aircel still exists, says Citigroup. Mindtree Consulting CMP: Rs 582.75 Target price: Rs 556 Religare has initiated coverage on Mindtree Consulting with a ‘sell’ recommendation as it feels that operational risks are raising concerns and valuations are expensive. While Mindtree has been one of the fastest growing mid-tier Indian IT services company, growth has slowed down significantly in FY07 and is further expected to slow down in FY08 due to rupee appreciation, says the report. “Risks to growth is significant as more than 65% of the revenues come from development projects which are highly dependant on the discretionary IT spend of clients. In the event of an economic slowdown in the US, discretionary IT spends would be curtailed,” adds the report. However, the report adds that the estimates do not factor in any large deals that the company might win that could fuel higher-than-expected earnings growth. IOB CMP: Rs 138.15 Target price: Rs 150 Angel Broking has recommended a ‘buy’ on Indian Overseas Bank with a 12-month price target of Rs 150. “IOB remains in a ‘sweet spot’ with its superior return ratios, consistently high net interest margins, better operating efficiency and higher leverage. Going ahead, with the government’s holding at 61%, IOB would be an active candidate in the consolidation process in the PSU banking space,” says the report. Meanwhile, the brokerage has valued the bank at a 10% discount to fair value to factor in its geographical concentration. The report has also factored in positives like well-managed assets and liabilities to drive earnings, a significantly derisked investment book and strong operating performance. Further, IOB is well-placed on the capital adequacy ratio (CAR) front. “For FY07, the bank reported CAR of 13.27% of which Tier I comprised 8.2%. Post implementing Basel II, management expects CAR would stand at 12%. IOB has to comply with Basel II guidelines by FY08 due to its overseas branch network. We do not expect the bank to dilute its equity in the near term,” adds the report.

Mindtree Consulting

Mindtree Consulting

Mindtree Consulting

Mindtree Consulting

IDEA Cellular, Hero Honda, Castrol India, Mindtree Consulting, Mahindra Gesco Developers, ABG Shipyard, KEC International, Mahindra and Mahindra Finan

IDEA Cellular, Hero Honda, Castrol India, Mindtree Consulting, Mahindra Gesco Developers, ABG Shipyard, KEC International, Mahindra and Mahindra Financial, Lanco Infratech

MindTree Consulting: Hold

The MindTree Consulting stock has delivered strong returns to its IPO (initial public offer) investors, with a 78 per cent jump from its offer price. For 2006-07, the company met earnings forecast made at the time of the IPO. The stock remains a preferred exposure among mid-size IT companies, considering that the bright growth prospects and the increasing revenue contribution from high-value services could be engines for higher realisations. Over the past year, the stock valuation has risen about 30 times the trailing earnings, which is a significant premium to other mid-cap IT companies. Shareholders can retain the stock, while fresh exposure can be timed to price weaknesses.

MindTree Consulting delivers broadly IT and Research and Development services. While the former consists of application development and maintenance, business intelligence solutions, ERP (enterprise resource planning) and supply chain management, testing, and mainframe, the latter is focussed on product-realisation services in product and semiconductor design, operating systems, protocol engineering, embedded applications, product testing and licensing of intellectual property.

This segregation gives the company a blend of volume-driven services on the one hand, and high-value services (in terms of execution complexity and revenues), on the other.

Business Outlook

A closer look at some of the key metrics and the rising trend in the contribution of some of its services indicate that the company has reasonable prospects in the medium/long-term.

Better spread: In terms of geographical spread, the company derives a chunk of its revenues from the US though it has significant presence in Europe, Asia-Pacific and India (all contributing about 36.7 per cent to last year’s r evenues). This augurs well on two counts. One, it gives greater visibility across locations and broad-bases its clientele. Two, there is better protection against currency risk, thus helping revenue realisation.

Service mix: Services such as consulting contributing 4.7 per cent of revenues, independent testing (3.4 per cent), and IP (Intellectual Property) licensing (0.8 per cent) have shown a rising trend on a sequential basis, which is healt hy.

One, all these services are high-revenue-earners and an increasing trend could mean smooth realisation; and, two, it indicates that the company may be climbing the services value-chain.

Trends relating to verticals of operation, client adds and repeat business are also worth noting. In the March 2007 quarter, the Banking and Financial Services (BFS) vertical contributed 24.6 per cent of the company’s revenues replacing the manufacturing vertical as the biggest contributor, which is a positive for MindTree. IT spend by overseas clientele is normally higher in the BFS vertical compared to other sectors.

The company added 17 clients this quarter; two are million-dollar clients. Sustaining this will help the company scale up its level of operations and realise better margins on its projects. MindTree generates 92 per cent of its revenues from repeat business. This compares favourably even with Tier-1 companies.

Risks: The utilisation level, at 62.7 per cent, has declined 7.7 percentage points on a sequential basis (March quarter); this along with a slight increase in attrition are execution risks.

Of the 155 active clients, the top 10 contribute 50.7 per cent of its revenues, indicating a high top-clients concentration. This also indicates that nearly half the company’s revenues comes from a large number of low-value projects, which could pose challenges in terms of optimal resource allocation. The company may also face execution risks on account of this.

The company’s recent foray into IMS services, which is a niche area for Indian players, needs to be watched, considering the competition from some of the Tier-1 players. Lastly, there is the risk of rupee appreciation vis-À -vis the dollar (only $13 million of revenues was hedged last quarter).

Valuation: The stock trades at a significant valuation premium to players such as Hexaware Technologies and I-Gate Global. Considering that MindTree has been able to scale up its operations above its peers in a relatively short perio d, a premium valuation for MindTree appears justified.