Mindtree - Improving Momentum! - IIFL

Deal wins, improving PES biz to help improve momentum

Mindtree's performance over the past couple of years, though not sector leading, has shown definite signs of improvement. This was supported by the sustained traction in IT services business owing to its specialized go-to-market strategy, robust client mining and more recent improvement in demand. Over past four to six months, the deal momentum has shown improvement with higher deal visibility and conversion ratios. The Product engineering (PES) business which was in the midst of restructuring and certain client specific ramp-downs too seems to have turned the corner as evidenced by better management commentary and improving discretionary spending.

Margin outlook stable on the back of multiple levers

Margin performance of Mindtree has been impressive with a sizeable part of the up-tick over FY13 coming from operational improvements. Despite the negative impact of salary hikes, branding expenses and visa costs (total of ~350bps+), the margin expanded 530 bps supported by weak rupee, operational efficiencies and realisation improvement. Decent margin levers in the form of sustained rupee depreciation, utilisation headroom, employee pyramid and improving fixed price projects contribution should help margin performance going forward. Also, considering the relatively high offshore concentration, the negative impact of possible protectionist move in the key markets should be offset to a certain extent.

Attractive pick in backdrop of improving sector dynamics

Better-than-expected and well rounded Q1 FY14 results for most IT companies in our coverage as well as improving management commentary have lowered concern on the demand environment. The expectation of a stronger FY14, better deal visibility/wins as well as push back on the timing/possible impact of US immigration bill have increased sector attractiveness. This is especially true considering the weakened investment thesis for large part of the market, resultantly making IT a safe haven. Within IT, we believe, Mindtree valuations continue to be attractive at 8.5x FY15E earnings (vis-a-vis its historical average of 12x). Maintain BUY.

Source : Equity Bulls

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