SELL Mindtree - AnandRathi Institutional Research

Mindtree - Strong revenue growth, but margins weak; we retain our Sell

Mindtree reported an impressive, 2.3% qoq, revenue growth, but 111bps dip in the EBITDA margin, leading to lower-than-expected EBITDA. It elevated Rostow Ravanan to CEO-designate. Krishna Kumar will be executive chairman, focusing on the five-year strategic roadmap. We fear low margins due to high onsite work and pricing pressures in the traditional business, leading to lower EPS growth.

Dollar revenue growth at 2.3% qoq. Mindtree's Q3 FY16 revenue was $184.4m (up 2.3% qoq, 24.8% yoy), 1.5% better than we estimated. This strong revenue growth, even in a traditionally weak quarter, was aided by a 3.7% realization increase offset by a ~1.8% qoq decline in volume. Of the service lines, growth was led by IMS (up 9% qoq, revenue contribution 18%) while other service lines grew just 1% qoq.

EBIT margin dips 117bps qoq. The EBIT margin was 14.1% (down 117bps qoq, 357bps yoy), lower than estimated. This was after absorbing the wage-hike impact for 28% of the workforce and capacity additions (70bps impact) offset by a 30bps currency benefit. The utilisation decline of 290bps qoq to 68.5% reflects strong fresher hiring and should act as a margin lever.

Acquires Magnet360. Mindtree acquired the US-based Magnet360 for its expertise in cloud solutions and consulting services, for $50m ($37m upfront plus payouts). Magnet360's revenue in 2015 was $25m, up 20%. It is an onsite-driven business, with 100 employees. Its margins are now lower than Mindtree's. This deal is expected to be closed by Q4 FY16.

Business outlook. Mindtree expects that Q4 FY16 revenue growth and margins would be better than in Q3, excl. the impact of acquisitions. It expects margins to improve gradually next year though it acknowledged that returning to 17-18% EBIT margins might be difficult.

Valuation. We raise our FY16/17 revenue estimate ~7.7% and lower our earnings estimate ~9%, chiefly due to lower other income. We are not building in Magnet360 yet. We move our TP to FY18e EPS to Rs. 1,380 (16x FY18e). We retain our Sell due to high valuations. Risks. Acquisition-related challenges.

Shares of MINDTREE LTD. was last trading in BSE at Rs.1443.05 as compared to the previous close of Rs. 1446.4. The total number of shares traded during the day was 19631 in over 2845 trades.

The stock hit an intraday high of Rs. 1467 and intraday low of 1405.15. The net turnover during the day was Rs. 27965153.

Source : Equity Bulls

Keywords