>MINDTREE (CITI)

Sell: Decline of ~8.5% in Revenues and ~900bps in Margins QoQ

■ Revenues/margins significantly below expectations — Mindtree reported 1Q10 revenues of $62.1m, down ~8.5% qoq (CIRA expectation: $67.7m). EBITDA margins declined ~900bps to 16.6% and receivable days worsened to ~86 days (4Q09: 70 days). Significantly higher other income of Rs332m (4Q09: loss of Rs480m) resulted in higher than expected profit after tax of Rs567m.

■ FY10 guidance revised down post 1Q — MindTree management has revised its FY10 guidance lower just three-months after issuing full year guidance. Revenues are now expected to be $255m-270m (earlier $290m-300m) and net profit is expected to be ~Rs1.5b-1.8b (earlier Rs1.9b-2.0b).

■ Other highlights of 1Q results — Volumes declined ~3.4% while pricing declined ~3.8% sequentially, mainly due to fixed price contract slippages. Net forex gain in 1Q was Rs305m (loss of Rs493m in 4Q).

■ Tier-I vs. Tier-II: Increasing difference in trends? — While Tier-I players like TCS and Infosys have delivered good results in 1Q, smaller players like MindTree have struggled. We believe this is due to: (1) Discretionary proportion is higher for Tier-II players in most cases, and (b) More deals today are multi-year deals in maintenance, BPO and infra – where Tier-I players are better placed.

■ Maintain Sell; Revised guidance still not conservative — MindTree’s earlier guidance implied ~5-7% CAGR in revenues qoq from 2Q-4Q to meet FY10 guidance, a stretch in our view (see ‘Indian Tech’ report, 10 June 2009). Present guidance implies ~2-6% growth and risk of disappointment remains. The stock has appreciated meaningfully over the past few days along with the sector. Post this disappointment we see meaningful downside ahead. Maintain Sell.

To see full report: MINDTREE