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• 12 June 2013
• CMP: Rs 800
• Mid Cap – Mkt Cap 3550 crores.
• Advice:  Buy

Executive Summary

Mindtree Ltd is a mid-sized IT services company based out of Bangalore. It has good management, experienced professionals drawn from the industry. The growth of the firm has been steady. Revenues, EBITDA and PAT have gained by 26%, 27% and 25% CAGR over the last 6 years. Mindtree has reached a certain critical size in terms of revenue and employees, from which growth can accelerate and it can be a large cap in 4-6 years. We expect these plans to play out and make it a very rewarding investment. 

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Mindtree Ltd. (MT) is a new age Mid Cap software services firm based in Bangalore.

Business Snapshot:

• The consolidated turnover is Rs 2,362 crores and Profits 339 cr (FY13).
• The Chairman is Subroto Bagchi and MD-CEO is Krishnakumar Natarajan; they co-founded the firm in 1999. Today it has about 11,600 employees, spread over Bangalore, Chennai, Hyderabad and Pune.
• MT has a focus on 4 business verticals; USA is the largest revenue market, see Fig 1 A and B.
• A recent achievement was the UID/Aadhaar project where MT developed the core application.

Pricing Snapshot

The view of the share price of MT in 6 years since the 2007 IPO shows us:

• From the IPO at Rs 425, the share price has risen by an annual average of 11.5% in 6 years.
• The share has been volatile, as post IPO the peak was 1021, and the bottom 187 in 2009.
• The Dividend has risen to the current 120%, see Fig 2, indicating a dividend yield of 1.5%.

Financial Snapshot

• The Revenues, EBITDA and PAT have gained by 26%, 27% and 25% CAGR over 6 years.
• MT is virtually debt free and has Cash on its books of 603 cr. or Rs 145/ share.
• The average PE over the last 6 years is at 20 times. The P/E has moved in a range of 9-35 times, and is currently at 10 times.
• In the last 3 years, the P/E of MT has been in the 8-14 times range, even as the share price has increased 2.5 times, in line with EPS growth.

 Opportunities and Strategies

• The worldwide end-user spending in IT Services was US$ 845 billion in 2011, while Indian turnover was $88b, indicating a 10.4% global market share. (Source: Gartner, NASSCOM). Thus there is ample opportunity to grow.
• Also big opportunities lie in adjacent /related markets like Software Products and bundled Hardware-Software solutions.
• The industry contributed to 7.1% of the Indian GDP.
• India has a competitive advantage in IT services due to availability of skilled manpower, good telecom/ internet infrastructure, English language skills and a lower cost structure.
• With the industry having taken off in India in the 90s, the Indian firms now have sufficient scale, maturity and focus to be in contention to win IT services business in many global markets.
• The recent USD strengthening (to around Rs 58) has improved the outlook for all IT exporters.
• The IT Services industry has for long been linear in its growth, with addition of human resources contributing much of the business growth. But new business models are Non-linear, like SaaS, Outcome based contracts, platform based solutions, creation of IP, Products, etc.

• MT’s identified business verticals of Product Engineering Services, Auto & Retail, BFSI and Travel, Media & Services are large sectors with good potential. Newer IT business trends like Mobility, Cloud and Open Source also seem to be well mapped. (Some important trends that we’d like to see MT into are Social Media and Big Data and Analytics).
• MT is quite clear that growth will be organic and not through M&A. This is beneficial for investors.
• With employee base > 10,000 and IT services turnover > 2000 crores, MT can be seen as a firm that has crossed a certain critical mass and now can bid for much larger new assignments.
• MT is reducing its long tail of ‘small clients’ and focusing on mining its Fortune 500 clients to add service lines and grow business rapidly.

Opinion, Outlook and Recommendation

• Over the next 2-3 years, exports growth is going to become very important in the Indian economy. The Software sector which is the leading exporter (25% of Indian exports in FY13) will receive a number of sops and benefits. In addition the USD strengthening will also boost sector performance.
• MT is at a critical phase of growth, where it should be able to accelerate revenues and profits from this point, having achieved a certain critical mass.
• MT has cash on its books of Rs 145 per share. In other words, a share of Rs 800 actually costs you only Rs 655. This is not an empty hope or wish. The savvy management has increased the Dividend this year from 40% to 120% to distribute this cash. Further shareholder enriching events can be expected in the medium term such as increase in dividends, bonus shares, share buyback, etc.
• MT has gone through a cycle of very high expectations (and valuations) at the time of IPO, to a current state of low expectations. However it retains its essence of a savvy experienced management, global presence, absorption of new technologies and willingness to take small risks.
• MT is a Buy at current levels.

JainMatrix Knowledge Base

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