At a time when frontline IT companies have been struggling to deliver growth, MindTree a mid-sized player has led from the front. It has seen a robust revival in fortunes over the past 12-18 months and has handled the turbulent global economic environment well. At Rs 671, the share trades at 9 times its likely per share earnings for FY13. This multiple is lower than those of peers such as Hexaware and KPIT Cummins.

In the first half of this fiscal, MindTree’s revenues rose 33.1 per cent over the same period in 2011-12 Rs 1155.1 crore, while net profits increased by 66.2 per cent to Rs 154.7 crore. That these financials follow a robust show by the company in FY12 indicates that it has been able to tap client spends well. Increasing contribution from top customers, greater focus on IT services compared to product engineering services and stability in its key verticals suggest that the trend is sustainable. MindTree has also seen significant improvements in revenues from Europe.

An attractive effort-mix and increasing traction on fixed price contracts would help in improvements in margins.

Business Positives:

MindTree’s top customers have steadily increased their contribution to revenues over the past one year. Its top 10 clients now account for 46.8 per cent of revenues compared to 42 per cent a year ago. This clearly suggests that the company has been able to manage good repeat business. This enhances revenue visibility in a difficult macro environment.

The addition of large customers has also been on track with two additions made to the number of clients in the $20 million category and one in the $10 million bucket. The company has also increased focus on IT services over the past 12-18 months. Compared to engineering services, projects involving delivery of IT services tend to be for longer duration and are less discretionary in nature. MindTree now derives 68.5 per cent of its revenues from IT services, a good 4 percentage points higher than last year.

All its key verticals have grown with its key segment – BFSI, expanding at a faster pace, making its growth fairly broad-based. While revenues from the US have been steady, Europe has witnessed increased traction, indicating the difficult economic environment there hasn’t affected client spends significantly. MindTree has an excellent effort mix with 85 per cent of its workforce operating offshore, and thus optimising costs. The thrust on fixed price contracts (that ensure better realizations compared to time& material projects) would also help the company enhance margins. Competition from other mid-tier IT players, especially on the pricing front, is a key risk for the company.

(This article was published on November 17, 2012)
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