Accumulate Mindtree - Consistent inconsistency - Dolat Capital

Cut in outlook: Management has cut its outlook from NASSCOM growth to less than 11% growth for revenues in FY13 in USD terms, inline with our expectations. We believe achieving a double digit revenue growth is also daunting and holds the risk of a further cut. Management believes they expect better H2 (rare historically) in view of its stage of discussions on various large deals (6 deal all USD 20mn+) in pipeline.

OPM sustenance holds risk: Mindtree has witnessed 700bps improvement in OPM over FY12 driven by efficiency and Fx gains, sustenance of which we believe holds risk in view of soft revenue growth and rupee appreciation. We have build in 110bps decline in OPM systemically over next 6 quarters.

Strategy dicey: It has devised various strategies to boost up its growth but has not delivered consistently and changed track often. It started business of white label handset and then sold the assets in 2010. It later on emphasized on PES segment but is now witnessing slower demand in the segment PES Revenue grew just 1% CQGR in last 6 quarters (tough peers on confident on the business). We believe it does not possess any specific niche strength or business focus to drive its revenues in coming period.

Large deal missing: Mindtree has wide service offering across several vertical but has not been able to crack large multi-million dollar deals. It has just 100mn dollar client in its portfolio as compared for its peers who are witnessing traction driven by large deal signings. It has replicated model of other large IT companies but has not performed to potential owing to integration and other company specific issues.

View: Cut in revenue forecast, high expectancy from H2 and risk on OPM sustenance leads to lowering in our confidence on the stock despite economical valuations. Thus, we maintain our sector underperformer (among small cap stocks) on the stock with a Target price of Rs.765 valued at 8.5x of FY15E earnings (inline with current 1 year forward valuations).

Source : Equity Bulls

Keywords