>MINDTREE LIMITED: Product Engineering Services(PES) predominantly consists of R&D services (RDS) and software product engineering (SPE) services

■ Back to IT business but not before burning ~$14 million cash
In September 2009, MTL paid US$6 million to acquire Kyocera Wireless India Pvt Ltd, the Indian arm of Kyocera Wireless, with the intention of developing android powered 3G handset and IP in the 4G long term evolution (LTE) wireless infrastructure. However, the company called off its products foray in Q2FY11 earnings after investing ~$5 million in H1FY11. The rationale was that MTL underestimated the capital expenditure requirement including sharing of marketing costs & product inventory risks (MTL’s earlier estimate was $10-15 million vs. its revised estimate of $70- 75 million). Subsequently, MTL booked a restructuring charge of ~$3.2 million ($12-15 million earlier estimate) in FY11 to account for employee costs, cancellation of purchase orders and product prototype write-offs. Though the restructuring charge was significantly lower than the company’s earlier estimate, the series of events heightened investor concerns. However, they moderated subsequently led by renewed management focus on revenue growth through select service lines and verticals and operating margin expansion.


■ Reorganisation led to focus on select service lines & verticals
MTL identified PES and IMTS as growth areas and strengthened the same by acquiring Aztecsoft in May 2008 for $72 million and 7strata in April 2010 for | 7.2 crore, respectively. Signing of $70 million worth of deals in the infrastructure management services space manifests management focus and could help improve revenue visibility. Simultaneously, the
company did away with projects in the discrete manufacturing, energy & utility vertical to focus on core verticals and earned 48.6% of its Q3FY12 revenues from three verticals viz. manufacturing, banking & financial (B&F) and travel & transportation. Manufacturing (15.4% of Q3FY12 revenues) client roster includes six of the world’s top 10 CPG players including P&G, Unilever and Pepsi. Financial services (20.9%) counts AIG, ANZ and Symantec as its customers while travel & transportation (12.3%) has Avis and Sita as its customers.


■ Margins may improve led by different levers
MindTree’s margins performance was likely a reflection of strategic missteps rather that operational weakness. MTL’s EBITDA margins declined 717 bps to 11.8% in FY11 vs. 18.9% in FY10 led by the unsuccessful handset manufacturing foray and aggressive hedging. Note,
as of Q3FY12, MTL had ~$160 million hedges outstanding out of which $42 million pertain to the levered options taken in 2007 and would expire in March 2013. These options do not qualify under accounting standard AS-30 (MTL changed its accounting treatment to AS30 from AS11 effective April 1, 2008) and would have mark-to-market P&L impact till expiry. That said, some of the margin improvement levers include employee pyramid and admin expense rationalisation. Administrative expenses stood at 20.4% of Q3FY12 revenues. Employees with less than three (<3) years of experience constitute a modest 36.7% of the total employee base but could improve as MTL has offered ~3000+ (2,400 for FY12E) campus offers for FY13E. Assuming 70% acceptance ratio yields a net fresher intake of 2,100 employees and could help flatten the employee pyramid yielding EBITDA margin expansion.


To read full report: MINDTREE
RISH TRADER