>Mind Tree (RELIGARE)

Forex loss disappoints, guidance upbeat

Revenues in line, margins disappoint
MindTree’s dollar revenues have slipped 9.1% QoQ during Q4FY09, owing to sequential dips in volumes and pricing (consolidated) by 7% and 2% respectively. Individually, dollar revenues for MindTree and Aztec decreased by 9.1% and 9% QoQ respectively. The EBITDA margin for the quarter, at 25.7%, shed 484bps QoQ as against our expectation of a 235bps fall. The steep margin decline is attributed to a 6.5% QoQ rise in cost of revenues in MindTree, despite the fall in topline.

Forex losses continue to erode profits
Net profit at Rs 211mn came in significantly below our estimate of Rs 437 due to above-expected forex losses. The company provided for forex losses of US$ 4.2mn during the quarter as the rupee depreciated further by 4.4% on an end-to-end basis.

Upbeat FY10 guidance
The management expects a marginal decline in revenues during Q1FY10, after which it sees a recovery in demand based on discussions with existing customers and its new deal pipeline. Accordingly, it has guided for FY10 revenues of US$ 290mn–300mn, a growth of 6.5–10% YoY. EPS for FY10 is guided to be in the range of Rs 49.3–50.9, much ahead of our expectation of Rs 37.9 and the consensus estimate of Rs 39.7. The guidance is based on an exchange rate assumption of Rs 51.4/US$.

Estimates revised upwards
We are increasing our FY10 revenue and earnings estimates for MindTree by 9.3% and 17% respectively, considering the strong management guidance. Our FY10 EPS estimate of Rs 44.4, however, continues to fall short of the lower end of the guidance. Though we believe the company could achieve its dollar revenue guidance, matching up to the earnings target would prove difficult considering the margin headwinds expected in FY10.

Revising target to Rs 244, maintain Sell
Consequent to the upward revision in estimates, we are increasing our target price from Rs 184 to Rs 244. We have valued MindTree at 5.5x on FY10E consolidated earnings of Rs 44.4. At the current price of Rs 307, the stock is trading at 6.9x and 6.4x on FY10E and FY11E earnings, which we believe are rich valuations. We maintain a Sell on the stock.

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