Mindtree - Drab growth justifies current valuations - Tata Securities

Mindtree has witnessed a multi-fold jump in its financial performance in the last two years. Its EBITDA and net profit have increased 2.7x and 3.2x over the last eight quarters as it benefited from large deal signings, client mining and INR depreciation. The growth was despite revenues from product engineering business seeing a CQGR of -0.7% and its share in overall revenues declining from ~41% in 3QFY11 to ~30% in 3QFY13.

However, like its peers, the growth has started to taper off in the last few quarters. Lack of large deal signings and a slow growth in the product engineering business have impacted its revenue growth. We expect the company's FY13 revenue growth to be 8.3%, lower than the NASSCOM's estimate for the industry growth. The growth is expected to be ~14% in FY14, in line with NASSCOM's guidance. Moreover, we expect its EBITDA margins to decline going forward. We expect Mindtree's revenues and EBITDA to grow at a CAGR of 12.8% and 6.1% between FY13-15, as compared to a CAGR of 25.1% and 67.7% between FY11-13.

The stock is currently quoting at FY14E and FY15E PER of 10.3x and 9x respectively. The stock got re-rated over the last few quarters on account of string of revenue and profitability growth. However, with the growth expected to taper off to the industry level, we do not expect the re-rating to continue. We, therefore, initiate our coverage on the stock with a Hold rating and target price of Rs888/share, 9x FY15 EPS.

Source : Equity Bulls

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