Mindtree Consulting downgrade to neutral - Motilal Oswal

MTCL had announced an organizational re-jig in the last quarter, post which Product Engineering Services (PES) is no longer a separate business unit but now Hi-tech vertical. Also, it announced a separate hunting team, which we believe is driven by continued decline in addition in the number of new clients in the past couple of years.

In 2QFY14, the company expects tailwind from currency to be partially offset by wage hikes effective during the quarter. During 1Q commentary MTCL had stated that wage hikes will be offset by operating leverage from growth and margins should be stable ex-currency.

Revenues from PES (now Hi-Tech) are expected to decline sequentially during this quarter, casting a doubt on structural turnaround in the segment. At least 30% of the PES segment, semi-conductor and consumer electronics continues to be under stress, and may mar the performance at least in the near term.

MTCL is currently trading at 10x FY14E and 9x FY15E EPS. We expect MTCL to grow its USD revenues at a CAGR of 14% over FY13-15 and EPS at a CAGR of 26.5% during this period.

Our current target price of INR1,310 discounts FY15E EPS by 10x, and implies 7% upside. We believe that while IT Services growth will remain healthy, turnaround in Hi-Tech vertical (PES) is imperative to deliver outperformance to peers. Following the stock's healthy outperformance in the near term and limited upside going forward, we downgrade MTCL to Neutral.

Source : Equity Bulls

Keywords