Analysts bullish on MindTree on signs of revival
However, investors are advised to rein in their expectations from stock price in short term, especially because the stock has rallied well in past few days.
By Narendra Nathan, ET Bureau | Updated:
MindTree has surprised the market with a 7.3% revenue growth (Q-o-Q) in the first quarter, which was achieved due to the double-digit growth of 10.5% in IT services. The product engineering business, which has reported negative growth in the past few quarters, also turned around with a 1.7% Q-o-Q growth. MindTree could improve its US and Europe presence despite the prevailing uncertainties there. While the contribution from the US improved by 30 basis points to 60.3%, the European contribution improved significantly by 90 basis points to 22.8%.
Since expectations from the technology sector are muted now (even technology majors are struggling to report high Q-o-Q growth), the stock market rewarded these better-than-expected results by pushing the price from Rs 360 to Rs 400 in two days. Though the price has already risen due to the good results, analysts claim that the counter offers more potential. As is evident from the relative performance chart, significant underperformance remains to be bridged.
Revival signs: Analysts are bullish because the first quarter of 2011-12 showed the initial signs of revival for MindTree. This is because it is the first quarterly result after MindTree changed its track, deciding to focus on a few segments and generating significantly higher value from these. It seems this new strategy is paying off for MindTree. There are hints that its new client acquisition efforts are also yielding good results, with the company adding 25 new customers in the first quarter of 2011-12. The number of clients contributing over $1 million a year remained constant at 67 on a Q-o-Q basis.
Margins to improve: Despite a salary raise for 75% of its employees, the margins remained stable on a Q-o-Q basis (that is, while the EBITDA margin fell slightly from 11.2% to 11.1%, the net profit margin improved from 8.2% to 8.4%). Several factors like increased operation efficiency (utilisation up from 70.9% to 72.5%), additional working days in the quarter (the same won’t be repeated next quarter), improved realisation (up from $26.8 /hour to $27.1/hour) helped achieve this. This is very important considering the fact that its EBITDA margins had collapsed by around 10 percentage points from its peak achieved in the first quarter of 2009-10. Analysts are hopeful that the margins will continue to improve in the coming quarters. Since the remaining 25% of its employees will get their increment in July and it has also added 900 fresh graduates in this quarter, be ready for a muted margin growth in the second quarter as well. Though the management does not give any estimates, it has indicated that the margins will keep improving in the subsequent quarters.
Revival signs: Analysts are bullish because the first quarter of 2011-12 showed the initial signs of revival for MindTree. This is because it is the first quarterly result after MindTree changed its track, deciding to focus on a few segments and generating significantly higher value from these. It seems this new strategy is paying off for MindTree. There are hints that its new client acquisition efforts are also yielding good results, with the company adding 25 new customers in the first quarter of 2011-12. The number of clients contributing over $1 million a year remained constant at 67 on a Q-o-Q basis.
Margins to improve: Despite a salary raise for 75% of its employees, the margins remained stable on a Q-o-Q basis (that is, while the EBITDA margin fell slightly from 11.2% to 11.1%, the net profit margin improved from 8.2% to 8.4%). Several factors like increased operation efficiency (utilisation up from 70.9% to 72.5%), additional working days in the quarter (the same won’t be repeated next quarter), improved realisation (up from $26.8 /hour to $27.1/hour) helped achieve this. This is very important considering the fact that its EBITDA margins had collapsed by around 10 percentage points from its peak achieved in the first quarter of 2009-10. Analysts are hopeful that the margins will continue to improve in the coming quarters. Since the remaining 25% of its employees will get their increment in July and it has also added 900 fresh graduates in this quarter, be ready for a muted margin growth in the second quarter as well. Though the management does not give any estimates, it has indicated that the margins will keep improving in the subsequent quarters.
Comfortable valuations: As per the consensus estimates, MindTree is expected to report an EPS of Rs 36.17 in 2011-12, compared with the EPS of Rs 25.55 in 2010-11, a growth of 42%. Therefore, its current forward PE of 11.06 can be considered reasonable. However, investors are advised to rein in their expectations from the stock price in the short term, especially because the stock has rallied well in the past few days.
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