Stock Market Update on MindTree for 1QFY2012 with a Buy recommendation and a Target Price of `445 (12 months)
MindTree reported a strong performance for 1QFY2012. Revenue grew by 7.3% qoq, with volume growth of 6.2% qoq despite ramp down in Kyocera’s revenue. MindTree has been one of the good performers on the revenue growth front in the Indian IT mid-cap space, growing by 21.5% yoy in FY2011 – the company managed this show despite its main founder, Mr. Ashok Soota, exiting the company, which had resulted in a steep de-rating of the stock in 1QCY2011. Further, fears of operational mayhem that took place post the company entered wireless handset manufacturing are behind, as the company exited the business in October 2010. We expect MindTree to continue its growth momentum at a 21% CAGR and return to profitable growth FY2012 onwards. We recommend Buy.
Quarterly highlights: For 1QFY2012, MindTree reported dollar revenue of US$92.5mn, up 7.3% qoq. In rupee terms, revenue came in at `413.1cr, up 5.6% qoq. EBITDA margin for the quarter fell by only 17bp qoq to 11.1%, even when margins had negative impacts of 1) 300bp qoq due to wage hikes given to 76% of the employees from April 1, 2011 and 2) 80bp due to rupee appreciation against dollar, which is a commendable task. These negative impacts were overshadowed by strong volume growth and improved utilisations.
Outlook and valuation: We expect MindTree’s IT services segment to remain a growth driver because of the recent wins of two deals (one in UK and another in US) worth US$35mn each in the IMS space. We expect the PES business to start growing at the company’s average rate in FY2013. We expect MindTree to post a 20% CAGR in USD revenue over FY2011–13E, with EBITDA and PAT expected to grow at a 25.5% and 26.8% CAGR, respectively. At the CMP of `359, the stock is trading at 8.9x FY2013E EPS of `40.5, i.e. with a PEG ratio of merely 0.33x. Thus, we value the stock at 11x FY2013 EPS (45% discount to Infosys), i.e. with a target price of `445, and recommend a Buy rating.
