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Though the markets are at a new high, there are still a few defensive bets in the IT sector at reasonable valuations. From the mid-tier software services pack, Mindtree has been able to exceed the industry’s growth rate for the past few years.
Investors with a two-year horizon can consider buying the stock.
Growth in key verticals, a ramp-up in spending by top clients, additions of large-sized customers and improvements in key operational factors are the positives. The company’s utilisation rate has increased and fixed-price contracts, which ensure better realisations than time and material projects, are contributing more to revenues.
At ₹1,125, the stock trades at a little under 18 times its likely per-share earnings for fiscal 2015. This is lower than the multiples commanded by peers Hexaware and Cyient (both trade at about 20 times).
In the first half of this fiscal, Mindtree’s revenues rose 22.1 per cent over the same period in fiscal 2014 to ₹1,725 crore, while net profit was almost unchanged at ₹263.5 crore.
Profit did not rise because of employee expenses and lower forex gainsExpenses were also higher as the company has increased investments in overseas markets, particularly the US and the UK.
Key factors improveOver the past couple of years, revenues from key verticals have grown at a healthy pace. Only the hi-tech segment has been subdued.
Also, customer addition has been healthy. It added one customer in the $30 million category, two in the $20 million bucket and three in the $10 million range. It has also ramped up revenue from existing clients. The Top 10 clients now account for 48.8 per cent of revenue.
The company has consciously let go of customers when the value derived is low.
As a result, Mindtree has grown across all its segments.
Operationally, the company has increased utilisation rates by 4 percentage points over the past year to 74.2 per cent, indicating significant volume traction. Fixed price contracts have risen steadily and now account for 43.6 per cent of revenue.
The company has seen higher onsite revenues as a result of ramping up its strength overseas. But it has still sustained operating profit margins at a healthy 20 per cent.
Attrition has been increasing over the past year and is at 15.7 per cent. Any wage hike may affect margins.
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