Mindtree posted an in-line quarter, with revenue growth of 1.7% q-o-q (volume growth of 1%) and Ebitda margin expansion of 130 bps q-o-q to 22.1%. However, for the full year the company has cut its $ revenue growth outlook to less than 11% (from 11-14% earlier). Even to achieve 11%, the company would require +4% q-o-q growth in both Q3 and Q4, which might be difficult to achieve in a seasonally weak part of the year. We are forecasting revenue growth of 8.7% in FY13. While margin expansion was encouraging (led by rupee weakness and operational improvement), a muted headcount rise of just 53 (0.5% q-o-q) during the quarter was the most disappointing operational data. This comes on the back of a 1.5% reduction in headcount in Q1. While the company might be adding more campus hires in the coming quarters, during Q2 there were only c60 trainees (calculated based on utilisation rates).
Blended pricing rose a tad by 0.6 % sequentially, owing to a higher onsite mix and a 1% rise in offshore pricing, which was partially offset by an onsite pricing decline of 2.3%. Improvement in operational efficiency and favourable currency contributed to c2.5% and c1.4%, respectively, to the margin, which was partially offset by wage increase (c-1.8%) and rebranding costs (c-0.7%). Forex losses in the quarter were R41.5 crore, impacting the net income. The effective tax rate for the quarter was 11.4% owing to a tax credit of R9.7 crore, which partially offset the effect of exchange loss on the bottom line. Overall EPS for the quarter was R17.7 compared to R21.9 for 1Q13.
The US and Europe grew 1.7%/3.5% sequentially while India declined 4.7% q-o-q in dollar terms. Demand was strong in BFSI (6.3% q-o-q) and Manufacturing (3.4% q-o-q) whereas Transport vertical (-8.5% q-o-q) saw a ramp down by a large client. Utilisation (excluding trainees) rose to 72.3% compared to 71.5% in Q1 FY13. The company saw strong traction from its top client which grew 8.4% q-o-q.
We remain Neutral on the stock (largely supported by an inexpensive valuation), with a target price of R700 based on 8x FY14e earnings . The stock is trading at a PE of c8x on our FY14e EPS. We cut our FY13 earnings by 3% to factor in the slower growth. We are 6% below consensus FY13e earnings.
HSBC
