Mindtree - 1QFY2014 Result Update - SPA Securities

Mindtree reported Q1FY14 results above expectations at $118mn (SPAe: $ 114mn). The revenue grew at 5.8% QoQ to INR 6.5bn. The margins in the quarter declined by 60bps to 18.4% on the back of incremental visa costs. The PAT grew by 71.6% QoQ to INR 1,354mn on the back of forex gains of INR 618mn against a forex loss of INR 153mn in Q4FY13. We expect an improved demand scenario to help achieve stronger growth along with margin expansion due to currency tailwinds. Thus we continue to recommend BUY with a target price of INR 1,200 based on 12x FY15E earning.

Revenue Growth - Volume driven

Mindtree's Q1FY14 revenue growth of 4.2% to $118mn was on the back of volume growth of 4.1% with a stable realizations (-0.81% offshore and -1.70% onsite). In INR terms revenues grew by 5.8% due to 1.5% decline in INR/USD rate. The company saw increased traction BFSI and Manufacturing verticals emanating out of US.

Margins - Declined

Q1 EBIT margins declined by 90bps to 15.6% due to higher SG&A spend and partial wage hikes offsetting any INR deprecation gains. Company would witness further pressure on margins due to wage hikes to be given in Q2FY14. Q1FY14 PAT registered 71.6% growth QoQ on the back of hedging gains of INR 618mn.

Deal Pipeline

The company has hinted towards a strong deal pipeline both in the IT services and PES business and expects FY14 growth to be better than FY13. Company signed deals worth $95mn including contract renewals. It added nine new clients taking the total count to 222 down from 232 due to tail client rationalization.

Management Commentary

The company has expanded its client focus program to top-40 clients to increase its share in the clients IT spending pie. To meet this end company continues to invest in the front-end sales team. Mindtree has given campus offers to 1,700 freshers which would join in FY14 (incl. 800 overflow from FY13) a major chunk of which will join in H1FY14. This along with wage hikes in Q2FY14 would put pressure on margins in H1.

Growth Segments

Package Implementation remained volatile with a decline of - 27.5% QoQ as against a growth of 15.4% QoQ in Q4 on the back of 55.5% growth it showed in Q3. IMS with 7.9% sequential growth was the other strong revenue driver besides AMD (9%).

Outlook and Recommendation

We expect FY14 growth to be back-ended with USD revenue CAGR of 17.6% over FY13-15E. We expect margins to be at 17%/18.4% for FY14E/15E against 18% in FY13. Forex would be a tailwind in FY14. We estimate an EPS of INR 100/share for FY15E. Thus we recommend BUY with a TP of INR 1,200 based on 12x FY15E earnings.

Source : Equity Bulls

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