Buy MindTree Ltd - TP Rs.730 - Emkay

Buy, Target Price Rs 730 On the improvement trail

Back to Basics' approach continuing to deliver results: After disappointing performances through FY10-11, focus on fewer verticals, clients and service offerings has delivered results. We highlight that despite the drag from PES segment MindTree grew higher than industry in FY12 with expansion in margins through every single qtr.

Client mining+ focus verticals+ increasing proportion of annuity revenues: Top 5/10 clients grew by 36%/31% YoY in FY12. MindTree has been making the progress on building in annuity revenue streams with proportion of revenues from App Maintenance and IMS have increased to 23.4%/10% in March'12 qtr V/s ~20%/6% in Sep'10 qtr.

Valuations attractive given upside risk to earnings: A 70%+ upmove in the past 12 months might warrant some pause, but we remain positive on MindTree given inexpensive valuations at <9.3x/9.1x FY13/14E P/E and most importantly upside risks to earnings estimates. We note that we do not build in complete flow through of currency depreciation in our margin assumptions( FY13/14E op margins at 18.7%/17.7%).

Near term catalyst and earnings performance: We continue to see upside risks to street's earnings estimates (our earnings estimates are 10%/14% higher than consensus) and expect June'12 results to provide more confidence to this thesis.

Source : Equity Bulls

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