>MINDTREE

Bearing Fruit


Even as Mindtree’s strong EPS growth and out-performance versus consensus expectations (25% EPS beat in 4QFY12) has been a primary stock driver over the past year, a valuation re-rating is yet to fully materialise. The stock trades at 7.7x FY14E EPS, leaving room for further upside, given good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, low consensus estimates. Our FY13E revenue/margin/EPS estimates are 10.4%/81bps/22.7% above consensus estimates while for FY14E they are 10.1%/75bps/25.3% higher, respectively. We assign a Buy rating to Mindtree with a TP of Rs820, implying a PE multiple of 10x FY14E EPS.


Still room for upside; multiple-based upside yet to materialise: Despite Mindtree’s outperformance vs the BSE Midcap Index over the past year, we believe there is room for upside. While strong EPS out-performance versus consensus has driven the stock price, a valuation re-rating is yet to fully materialise. Mindtree trades at 7.7x FY14E EPS, leaving room for upside in light of good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, still low consensus EPS expectations (FY13 consensus EPS Rs58.7 versus our estimate of Rs72). Improving client metrics drive confidence on the revenue front while a weak rupee is likely to support earnings and also provide headroom for re-investment in the business. Going forward, we expect stock upside to be driven by a multiple upgrade.


Our FY13/FY14 EPS estimates are 22.2%/25.3%, respectively above consensus: In our view, consensus estimates for Mindtree are conservative and do not factor in potentially higher margins on operational efficiency and a weak rupee. Consensus FY13E


EPS estimates are Rs58.7, implying growth of just 8.3% YoY. Our FY13E/FY14 EPS estimates are above consensus estimates by 22.7%/25.3%, respectively. While we expect good revenue growth, we also expect a weak rupee to support earnings, given Mindtree’s greater sensitivity to this factor (over 65% offshore revenue in 4QFY12). Our FY13E/FY14 rupee revenue estimates are 10.4%/10.1% above consensus estimates and margins are 81bps/75bps higher, respectively, driving our well-above consensus EPS forecasts. Going forward, we expect consensus forecasts to inch up, supporting the stock.


Mining focus boosts client metrics, drives confidence on revenue growth: Mindtree’s strategy of focussing on select verticals and leveraging domain expertise to gain client wallet share has paid dividends, and led to annualised revenue/client rising to US$1.7mn in 4QFY12 (US$1.2mn in 4QFY10). This reflects in rise in revenue share from top-10 clients (45.6% in 4QFY12 vs 40% in 4QFY10, 6.1% CQGR). Clients in different revenue buckets have also risen steadily, with US$1mn revenue clients at 77 in 4QFY12 (60 in 4QFY10).


Valuation: Mindtree’s stock trades at 7.7x FY14E EPS. We initiate coverage on the stock with a Buy rating and a TP of Rs820, implying a PE of 10x FY14E EPS.


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