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25 October, 2014 06:58 IST
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Source: | 25-Oct-14
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Way2Wealth Securities has recommended `Buy` on Mindtree with a price target of Rs 540 as against the current market price (CMP) of Rs 450.25 in its report dated March. 02, 2012. The broking house gave the following rationale:

Mindtree is a diversified mid size Indian IT services offshoring company. Its breadth of offerings include IT Services, Infrastructure Management, Independent Testing, Knowledge Services and Product Engineering services.  We believe, the company would be able to achieve industry leading growth in topline due to its renewed focus to grow annuity based business streams and revamped vertical focused sales initiatives.

Margin levers are also high as the company is at the end of transforming its business and fruits have already started coming in terms of better revenue growth.  Based on our above believe and analysis, we are initiating coverage on MindTree with a `Buy` recommendation and expecting18-20% upside from the current levels

Renewed focus on core expertise driving growth:

After shelving the idea of foraying into the 3G Smart phone manufacturing space, MindTree management refocused on the core IT services business, with vertical concentric selling strategy. This seems to be started yielding results as over the first nine months of FY12, as topline registered industry leading growth of 22% with 203bps improvement in operating margins.

Concentrated vertical effort to increase efficiency:

MindTree`s selected vertical and sub-vertical focused business strategy to utilize the industry specialties and client references would bring efficiency as well as growth.  The company is strengthening capability in the manufacturing, financial services and travel transport vertical while doing away with some legacy projects in the areas of energy & utilities and healthcare.  In manufacturing, consumer and automotive and in financial services mid size banks are the targeted areas.

Mining the existing clients to bring growth:

Over the last one year management reorganized S&M activity around client mining. They hired talents from Tier I competitors to squeeze more business from existing biggies and reorganize incentive structure to encourage client mining.

Strong balance sheet to trigger inorganic opportunity:

Strong balance sheet position aid Mindtree to strengthen vertical and service offerings through inorganic route.  The company has history of acquisition to build up specific capability.

Revenue expected to register industry leading growth in FY13:

USD term revenue is expected to grow by 21.95% in FY12 followed by 17.95% growth in FY13 against the average industry growth expectation of 11-14% (by NASSCOM). Main growth drivers would be IT service focused business model, vertical centric sales approach and higher concentration on growing service lines, like, Testing and IMS.

Margin to strengthen going forward:

Operating margin is expected to achieve 14.14% in FY12E and continue to improve in FY13E to reach 15.39% mainly backed by better productivity, higher realization and reduced per employee pay-out due to pyramid re-structuring

Valuation:

At the current market price Of Rs 450, the stock is trading at 9x of FY12E EPS of Rs 49.91 and 8x of FY13E EPS Rs 60.42. Given the market leading growth expectation in FY13, we believe the stock to trade at 9x of FY13E EPS and reach a target of Rs 540.

Click here to view full report

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