Mindtree - On a roll - Standard Chartered Securities

OUTPERFORM, MTCL IN, CMP INR 945.2, Price Target INR 1080.0

- 1QFY14: Strong USD revenue growth; margin beat despite higher onsite; FX gains drive PAT 20% ahead of estimates.

- Better management of employee pyramid-utilisation trade-off increases IER's confidence in FY14 margin outlook. Note, INR-depreciation gains will be reflected only from 2QFY14.

- IER raises its FY14/FY15 EPS forecasts by 4%; this is after its recent 20% revision on INR reset. Thus, upgrades to consensus estimates could be sharper on dual impact.

- IER retains OP with a revised INR 1,080 PT (from INR 960).

- IER expects valuations to inch up on improved execution and margin defence, alongside receding concern over the US immigration bill (a key sector overhang).

1QFY14 – PAT beat on FX gain: Revenue grew 4.1% q/q to USD 118mn, in line, all volume driven and concentrated in IT services (+5.4% q/q). PES business grew 0.9% q/q. EBITDA margin declined 60bp q/q to 18.4% (versus IER's 18.1% est.), mainly on higher visa costs. PAT at INR 1.35bn (+72% q/q), ahead of estimates (INR 1.11bn) on higher FX gains (INR 618mn).

FY14 revenue outlook: Mindtree (MTCL) expects 2Q revenue growth to track 1Q; it had USD 90mn TCV deal wins (fresh + renewal) in 1Q after USD 165mn wins in 4QFY13. Recovery in the PES business (30% revenue share) stays modest. It re-organised its sales structure to cross-sell traditional IT services to PES clients and increase focus on new client acquisition. However, IER expects any impact to be long-range; its 14% FY14 USD revenue growth estimates are broadly unchanged.

Pyramid is helping in margin defence: IER lowers its caution on FY14 margin; MTCL has managed the employee pyramid-utilisation trade-off well in 1Q, absorbing the impact of higher onsite volume (+10% q/q). It expects constant currency margin to stay stable in 2Q despite the scheduled wage hike; we see 200bp+ gain net of INR depreciation (MTCL uses the previous month's closing rate for invoicing; thus, 1QFY13 INR weakness will be reflected after a lag in 2Q).

IER expects the rally to sustain. MTCL has gained 12% QTD; IER expects the momentum to sustain as consensus upgrades cycle revs up in line with its recent upgrade thesis (Mindtree: INR depreciation + time correction = upgrade, 4 July 2013). IER maintains Outperform. Its revised PT of INR 1,080 (INR 960 earlier) values MTCL at 9x 12-month forward EPS (8x earlier); we expect the stock's valuation to firm up on strong 1Q results and lowered risk from the proposed US immigration reform bill, which has been an overhang in sector valuations.

Source : Equity Bulls

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