We upgrade Mindtree to outperform (earlier neutral) and roll forward our valuation to FY15 with target price of R1,250 (from R970), implying an unchanged target P/E multiple of 10x for FY15e. The company is trading at 10x one-year forward earnings, which is at the middle of mid cap IT company trading band of 8x-12x one year forward earning.
After our change in the outlook on the demand scenario for the sector, we update our estimates accounting for the revised $/R assumptions and its impact on the company financials. We increase our FY14e/15e EPS by 12%/24% to account for changed $/R estimates, which is in line with the change across our IT coverage universe.
The US economy is in better shape and growth is back on track, as measured by the strength in the labour market. More importantly, the low share of the residential sector in GDP growth implies that the risk of the US turning back into a recession is low. The latter gives us more confidence in turning constructive on the sector. We believe tech spends will accelerate. Our recent interaction with industry experts make us believe that a sustained uptick in IT outsourcing spend over the next 12-18 months is underway. We believe this, coupled with a significant cushion from depreciation in R,will keep the win ratios for Indian vendors favourable.
The company derives ~70% of the total revenues from IT services. We expect the uptick in IT spending to benefit the segment directly going forward. We note that the pace of growth in this segment has been slowing down for the past 3-5 quarters, which should benefit from the changing demand environment.