Buy MindTree; target of Rs 1600: ICICIdirect

ICICIdirect.com is bullish on MindTree and has recommended buy rating on the stock with a target price of Rs 1600, in its research report dated April 23, 2014.

ICICIdirect.com's report on MindTree

• MindTree reported stellar Q4FY14 earnings, which were significantly above our and consensus estimates
• Dollar revenues grew 4.5 percent QoQ to USD 132.8 million (USD 131.1 million estimate) led by volumes (2.2 percent) and pricing (2.3 percent)
• EBITDA margins improved 200 bps QoQ to 21.5 percent, above our 19.5 percent estimate, led by revenue growth. Reported PAT of Rs 98.2 crore was also above our Rs 90.3 crore estimate, led by margin beat
• The company has proposed a bonus issue in the ratio of 1:1 and dividend of Rs 25/share for FY14

"Though MindTree does not guide, management commentary was relatively upbeat. It expects FY15E revenues to grow ahead of Nasscom's 13-15 percent growth guidance while Q1FY15 growth could at least be similar or better than Q4 led by robust deal signings leading to improved visibility. MTL has signed deals worth USD 133 million in Q4 taking the total signings in excess of USD 500 million on an LTM basis. MindTree highlighted its strategy of selling "services" to hi-tech customers is demonstrating early success and could help achieve double digit growth for the hi-tech business in FY15E and help accelerate growth."

"MTL's Q4 EBITDA margins expanded 200 bps QoQ to 21.5 percent led by revenue growth, pricing improvement, utilisation and operational efficiency. This is significantly higher than its FY09-14 average of 16.7 percent and represents an increase of 480 bps relative to the same. Utilisation extrainees rose 155 bps to 70.4 percent in FY14 vs. 68.9 percent in FY09. Further, though attrition increased 110 bps QoQ it is down 70 bps YoY. We expect FY15E margins to remain flat primarily led by revenue growth and efficiency offset by rupee and business investments."

"MindTree's top client reached annualised revenue run rate of USD 50 million in line with its articulated focus on client mining initiatives at the start of FY14. Client metric also seems to be improving as the company added 15 new customers in Q4FY14 vs. FY12-14 average of 12; 18 customers to USD 5 million band (24 in total) since FY08 and 27 to USD 1 million band (73)."

"At 68.7 percent, Q4FY14 utilisation was flat QoQ while FY14 utilisation declined 153 bps YoY to 70.4 percent vs. 72 percent in FY13. However, utilisation still continues to be lower than industry average and scope for improvement exists. Though LTM attrition increased sequentially to 12.7 percent vs. 11.6 percent in Q3, it has moderated substantially from 25.1 percent in FY11."

"The rupee depreciated 11 percent in FY14 and 14 percent in FY13, thus creating significant margin tailwinds as 1 percent change in rupee creates 30-40 bps of margin relief. Significant rupee appreciation could impact margin profile."

"We estimate MTL will report revenue, earnings CAGR of 14 percent, 16 percent over FY14-16E (average 20.2 percent EBITDA margins in FY15-16E), vs. 20 percent, 54 percent reported during FY09-14 (average 15.9 percent), given IT services refocus and anticipated acceleration in hi-tech vertical. We continue to value MTL at Rs 1,600 i.e. at 11.2x its FY16E EPS of Rs 142.9", says ICICIdirect.com research report.

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