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Research
Mindtree Ltd - Sustained revenue growth momentum building-up - IIFL
Posted On : 2013-12-23 20:40:22( TIMEZONE : IST )
Over the past six quarters, Mindtree has witnessed healthy dollar revenue CQGR of 3%. More importantly, the growth build-up has picked-up underpinned by ~US$400mn worth of deal wins in the past three quarters. The company has already seen a sharp acceleration in revenue growth during H1 FY14 (13.5% yoy v/s 7% yoy in H2 FY13). Management is pretty confident about revenue traction sustaining and this is reflected in substantial employee additions over past three quarters (cumulative addition of 18% software professionals on Q3 FY13 base). With overall demand environment also supporting, we estimate Mindtree to comfortably manage 16% dollar revenue CAGR over FY13-15.
Quality of growth also improving
What is also impressive about Mindtree is good quality of growth driven by intense efforts towards client mining and cross-selling of services. Progress in client mining is manifested in addition of four customers in US$5mn+ revenue bucket over the past 12 months and robust revenue growth of 18.5% yoy for Top 6-10 clients on LTM basis. Vertical-wise, growth is becoming more broadbased with improving contribution of even hi-tech space. Amongst services, company is investing ERP/Consulting and data warehousing/analytics hoping to repeat the growth success of IMS/Tech Support.
Significant scope for margin to improve in the longer term
In the near term, Mindtree's operating margin could marginally trend downward due to salary hike (for ~20% of employees), investment in strategic human capital and the impact of recent large addition in billable employees. However, in medium-to-longer term, sustained brisk growth would bring operational efficiencies which will drive material margin gains. Key sources of operational improvement would be age pyramid, SG&A leverage and employee utilization (currently at four-year low). We estimate FY15 OPM to be at least 100bps higher than FY14.
Top Pick in our mid-cap IT coverage
Given a more predictable and strong earnings growth outlook vis-Ã -vis peers, Mindtree's valuation at 11x FY15 P/E (in-line with them) is very attractive. Expect an immediate re-rating if OPM fall in Q3 FY14 turns out marginal.
