Mindtree Ltd: Improving Momentum! – BUY
CMP Rs1,031, Target Rs1,210
CMP Rs1,031, Target Rs1,210
Deal wins, improving PES biz to help improve momentum
Mindtree's performance over the past couple of years, though not sector leading, has shown definite signs of improvement. This was supported by the sustained traction in IT services business owing to its specialized go-to-market strategy, robust client mining and more recent improvement in demand. Over past four to six months, the deal momentum has shown improvement with higher deal visibility and conversion ratios. The Product engineering (PES) business which was in the midst of restructuring and certain client specific ramp-downs too seems to have turned the corner as evidenced by better management commentary and improving discretionary spending.
Mindtree's performance over the past couple of years, though not sector leading, has shown definite signs of improvement. This was supported by the sustained traction in IT services business owing to its specialized go-to-market strategy, robust client mining and more recent improvement in demand. Over past four to six months, the deal momentum has shown improvement with higher deal visibility and conversion ratios. The Product engineering (PES) business which was in the midst of restructuring and certain client specific ramp-downs too seems to have turned the corner as evidenced by better management commentary and improving discretionary spending.
Margin outlook stable on the back of multiple levers
Margin performance of Mindtree has been impressive with a sizeable part of the up-tick over FY13 coming from operational improvements. Despite the negative impact of salary hikes, branding expenses and visa costs (total of ~350bps+), the margin expanded 530 bps supported by weak rupee, operational efficiencies and realisation improvement. Decent margin levers in the form of sustained rupee depreciation, utilisation headroom, employee pyramid and improving fixed price projects contribution should help margin performance going forward. Also, considering the relatively high offshore concentration, the negative impact of possible protectionist move in the key markets should be offset to a certain extent.
Margin performance of Mindtree has been impressive with a sizeable part of the up-tick over FY13 coming from operational improvements. Despite the negative impact of salary hikes, branding expenses and visa costs (total of ~350bps+), the margin expanded 530 bps supported by weak rupee, operational efficiencies and realisation improvement. Decent margin levers in the form of sustained rupee depreciation, utilisation headroom, employee pyramid and improving fixed price projects contribution should help margin performance going forward. Also, considering the relatively high offshore concentration, the negative impact of possible protectionist move in the key markets should be offset to a certain extent.
Attractive pick in backdrop of improving sector dynamics
Better-than-expected and well rounded Q1 FY14 results for most IT companies in our coverage as well as improving management commentary have lowered concern on the demand environment. The expectation of a stronger FY14, better deal visibility/wins as well as push back on the timing/possible impact of US immigration bill have increased sector attractiveness. This is especially true considering the weakened investment thesis for large part of the market, resultantly making IT a safe haven. Within IT, we believe, Mindtree valuations continue to be attractive at 8.5x FY15E earnings (vis-a-vis its historical average of 12x). Maintain BUY.
Better-than-expected and well rounded Q1 FY14 results for most IT companies in our coverage as well as improving management commentary have lowered concern on the demand environment. The expectation of a stronger FY14, better deal visibility/wins as well as push back on the timing/possible impact of US immigration bill have increased sector attractiveness. This is especially true considering the weakened investment thesis for large part of the market, resultantly making IT a safe haven. Within IT, we believe, Mindtree valuations continue to be attractive at 8.5x FY15E earnings (vis-a-vis its historical average of 12x). Maintain BUY.
Source: IIFL
Note : Mindtree Ltd. is a Shariah Compliant stock and hence
those
investors who are following shariah guidelines can also invest in this
stock. Its Ethical to invest in this particular stock as of today 7th September, 2013. We will update if this stock is removed from the list of
Shariah Compliant Companies in future.
