Despite offering blockbuster returns in the past year, the MindTree stock remains modestly priced given the company’s rapid profit growth. At ₹1,664, the share trades at 12 times its likely per-share earnings for FY15.

This multiple is lower than that of other mid-tier IT players such as Infotech Enterprises and KPIT Cummins.

MindTree has seen a robust revival in fortunes over the past couple of years and has handled the turbulent global economic environment well.

Growth likely to sustain

Increasing contribution from its top customers, a greater focus on IT services compared to product engineering services and growth across its verticals suggest that MindTree may be able to sustain recent growth. It has also seen significant improvements in revenues from the recovering US market.

In the first nine months of this fiscal year, MindTree’s revenues rose 26 per cent over the same period in 2012-13 to ₹2,208 crore, while net profit increased by 35 per cent to ₹352.6 crore. That these high run rates follow a robust show by the company in FY13 indicates that it has been able to tap deeper into client spends.

Its effort-mix is still heavily tilted to offshore activity and thus, any increase in onsite hiring may not affect margins significantly.

MindTree’s top customers have steadily increased their contribution to revenues over the past year. Its top 10 clients now account for nearly 49 per cent of revenues compared to 47 per cent a year ago.

The proportion of repeat business has been well over 99 per cent, indicating that clients have been mined well. The company has also consciously culled customers based on potential realisations and the sustainability of long-term revenues.

Large customers

The addition of large customers has also been on track with two more in the $20 million category and four in the $10 million segment. The company has also increased its focus on IT services over the past couple of years. Compared to engineering services, projects involving delivery of IT services tend to be for a longer duration and are less discretionary in nature. MindTree now derives 73 per cent of its revenues from IT services, a good three percentage points higher than last year.

All its key verticals — BFSI, manufacturing, travel and transport — have grown at or faster than the company’s revenue rate over the past three quarters.

Only hi-tech as a segment has been a bit soft. While revenues from the US have been increasing steadily, Europe has of late witnessed increased traction, indicating that the difficult economic environment there hasn’t affected client spends significantly.

MindTree has an excellent effort mix, with 83.7 per cent of its workforce operating offshore, thus optimising costs.

Though onsite hiring has increased in recent times, the company’s margin has not been affected significantly and is in the 20 per cent region at the operating level. Competition from other mid-tier IT players, especially on the pricing front, is a key risk for the company.

(This article was published on February 23, 2014)
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