Incorporated in 1999, MindTree Limited (MindTree) deals in information technology (IT) and allied services. It offers software development services, infrastructure management, technical support services and data and analytics solutions and others. The company is co‐headquartered at Bengaluru (India) and Warren (USA).
It is a mid size IT player, MindTree mainly focusses on three business segments — IT services, product engineering services and wireless services. Under these heads, it offers consulting, application development, data warehousing, business intelligence, infrastructure management, knowledge processing services and others. IT services contributed ~58% of revenue in FY11, PE services ~38% and wireless services ~4%.
Overall Fundamental Rating
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Valuation Rating
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Below is the detailed stock analysis of Mindtree based on 25 fundamental parameters:
Graphs and Analysis Cloud
Graphs and Analysis Cloud
S.No
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Parameter Name
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Data
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Rating
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Remarks
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1
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Gross Profit Margin
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2008--41%
2009--27% 2010--39% 2011--31% 2012--32% |
3
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Gross profit margin is healthy.It is more than 30%.It went below in
2009 as there was a forex exchange loss of 176Cr in that year
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2
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Operating Profit Margin
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2008--16%
2009--5% 2010--20% 2011--10% 2012--13% |
2
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Operating margin is above 10% , in 2009 it went down due to forex
loss.
Operating Margin is much less compares to other IT majors like Infosys , TCS.Infosys operates at 35% , TCS at 28-29%.The main reason for this difference is that this company has different pricing policy.Billing rates are less compared to Biggies whereas the employee cost and other expenses remain in same ratio. Billing rates in some cases are less than 20-30% from big players like Infosys , TCS |
3
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Net Profit Margin
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2008--14%
2009--2% 2010--16% 2011--8% 2012--11% |
3
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Net profit has improved in last year.In Q1 Fy13 it was 15% and in Q2
Fy13 it was 12%.
Company is recovering from bad times.Quarterly results are now more predictable. |
4
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Selling , General and Admin expenses
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2008--35%
2009--47% 2010--26% 2011--36% 2012--27% |
3
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SGA expenses are under limit with less 30% of Gross Profit.
In 2009 it went up due to forex loss. |
5
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Depreciation %
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2008--11%
2009--16% 2010--12% 2011--14% 2012--11% |
2
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Depreciation cost is little on a higher side and computers, softwares
and leases taking the major depreciation cost.
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6
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Interest %
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5
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Company is essentially debt free.It has loans of 137Cr in 2009 which
has now reduced to 40cr.
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7
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Net Profit growth rate for past years
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2008--104.18 Growth -71%
2009--30.01 Growth 593% 2010--208.10 Growth -40% 2011--123.10 Growth 77% 2012--218.70 |
2
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Net profit growth rate is not encouraging, in 2009 forex loss of
176Cr.2010 was better with forex gain of 70cr which shot up the profit.In
2011 , forex gain was 15cr compared to 70cr in previous year. 2012 was
good.Q1 and Q2 of 2013 are good and if the dollar remains in range of 54-55
then Q3 can show some good amount of improvement
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8
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EPS growth rate for past years
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2008--27.47 Growth -71%
2009--7.90 Growth 566% 2010--52.66 Growth -41% 2011--30.75 Growth 75% 2012--53.94 |
2
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EPS growth has also not been encouraging due to above reasons
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9
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Dividend History
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2008--20.00%
2009--10.00% 2010--30.00% 2011--25.00% 2012--40.00% |
3
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Dividend is consistent but yield is .5%
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10
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Inventory
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2008--0.00 Growth 0%
2009--0.00 Growth 0% 2010--0.00 Growth 0% 2011--0.00 Growth 0% 2012--0.00 |
Not applicable for this company
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11
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Business , Advantage and Quality of Management
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Business is to provide IT solutions to clients.Main tasks are
application development , maintenance and support.Company has 2 segments :IT
services and Product Engineering.IT services business has 65% share and PE
has 35% share.
IT services business is growing well and is main driver of growth.PE business is facing challenges and it more or less stagnant. |
3
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Mindtree has good management team.Subroto Bagchi Co-founder and
chairman.He is a well known public figure.
Krishnakumar -KK is the CEO,MD and co-founder with more than 30 years of experience in IT industry.KK is also the Vice Chairman of NASSCOM. Overall the management team looks good. |
12
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Current ratio
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2008--2.5
2009--1.43 2010--1.6 2011--2.55 2012--2.24 |
4
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Current ratio looks comfortable well above 1
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13
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Debt to Equity
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2008--0.17
2009--0.26 2010--0 2011--0.01 2012--0.05 |
4
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Debt free company having surplus cash.As per Q2 fy13 , company has 438
cr as cash with 331cr invested in mutual funds.Company has equity of 1100Cr
as per Q2 Fy13 so cash is in healthy state
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14
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Debt/Earnings
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2008--0.88
2009--4.64 2010--0.01 2011--0.04 2012--0.2 |
it is nearly debt free company now so very low debt/ earnings
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15
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Is the Company generating free cash flow? Capital Expenditure?
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Capex
2009-- -18.87 2010-- 115.84 2011-- 291.45 2012-- 51.1 |
4
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Company is generating good amount of free cash flow.Operating cash
flow looks good in comparison to EBITA , refer to below graph.
Free cash flow has been positive and in good amount for last 4 years except for 2009 in which Mindtree acquired Aztecsoft for 291 cr, pune based company.Mindtree holds around 80% stake in Aztecsoft. 
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16
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Return on Equity & Return on assets
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Return on Equity
2008--19% 2009--5% 2010--32% 2011--15% 2012--22% Return on Assets 2008--16% 2009--4% 2010--32% 2011--15% 2012--21% |
3
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Return on equity and return on assets are around 20% which is average
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17
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graph of stock price
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Graph of stock has not been great as there are lot of variations in
the earnings.
It is strictly following earnings.When earnings are good then price is on high and earnings are bad such as in 2011 then price has declined , refer to attached graph.From Aug 2011 the graph is on uptrend as earnings are increasing consistently |
3
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18
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retained earning growth rate and its use
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2008--496.05 Growth 0%
2009--492.36 Growth 23% 2010--606.48 Growth 21% 2011--736.40 Growth 24% 2012--917.10 |
4
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Retained earning has been growing at a good rate.Retained earnings are
being mainly used for acquisitions , investment in mutual funds and expansion
of gross block.
In 2009 , Aztecsoft was acquired for 291 Cr.In Oct 2009 , it acquired Kyocera Wireless for 43 Cr.Some part of the money was used for leasing , buildings , software etc. In last 2 years extra cash was used to invest in mutual funds .Company has around 438Cr in cash and cash equivalents as of Q2 Fy13. |
19
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P/E ratio
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Mindtree has a p/E ratio of 10 as of nov 2012 , which is at discount
compared to peers.
Big Players Infosys - 14 TCS- 20 HCL - 19 Mid Size companies: Hexaware -10 Geometric - 9 |
3
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So PE of mindtree stands at 9-10 which seems to be justified as the
company is mid sized and period from 2008-2010 has not been very encouraging.
Company business is much more predictable now , if it shows 3-4 quarters with same performance as Q1 and Q2 of Fy13 then P/E can be upgraded to 12-13 |
20
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intangile assests , brand value and does a company have advantage over
others
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Mindtree has a strong brand value in mid sized IT space.
The one advantage company has is lower pricing. |
4
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As indicated in point 22 , IT business has now become more or less
commodity business , lower pricing can be a boon for the company
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21
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are insiders buying the stocks , is company buying back shares , are
mfs holding this company
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Company's Stock is held by more than 20 mutual funds and some of them
have upped their stake in Q2 Fy13.
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4
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Siddartha , founder of CCD has increased his stake from 17.79 to 21.26
in June 2012.He bought at a average price of 610 Rs in june 2012.
Foreign institutional investors are heavily invested in the company and now FII investment limit has reached. http://www.business-standard.com/india/news/fii-investment-in-mindtree-hits-trigger-limit-rbi/179540/on |
22
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Growth type of company and room for expansion
Impact of Industry parameters and Government policies |
Mindtree is a mid sized company with revenue of 1900 Cr FY12.
The company is in growth stage. Revenue for big players are in range of 20000-30000cr so it still has lot of room to expand. |
The whole IT industry has now become very competitive in last 4-5
years in which all players like Infosys, TCS , Wipro , Mindtree are providing
same types of services like software development , maintenance, application
migrations.IT service industry
has now behaving like a commodity business in which none of the company have advantage over others. In the whole story , time may be right for small IT companies as their pricing it 20-30% lower than the big players.This is where companies like mindtree, hexaware might click in. |
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23
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do you understand business , do you have edge in this industry,what do
you know which market does not know
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Neutral on this point as IT industry is the one of the most tracked
industry in stock market.Most of the fundamentals and business developments
are already factored in the stock price
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3
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One thing to note here.
Big client generally work with more than 1 IT provider. Now Mindtree is also working with other IT players to support client's IT needs and in some cases Mindree share is increasing due to lower pricing and also due to change in strategy of the company to focus on big players.This can go in favour of the company |
24
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Competition
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Infosys:
OP Margin - 35% , PE- 14 , Sales 31000Cr. TCS: OP Margin -27, PE -20 , Sales -38000Cr Mid Sized IT companies: Hexaware: NP Margin - 18%, PE - 10 , Sales - 1450 Cr. Persistent: NP Margin -14% , PE -12 , Sales - 1000Cr Mindtree: NP Margin - 11% , PE - 10, Sales -1900cr |
3
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Mindtree is a small sized IT company so it makes sense to compare it
with companies like Persistent , Hexaware instead of Infosys,TCS.
Mindtree is a well managed mid sized IT company. Currently almost all big players are operating in range of 25-35% of OP Margin and Mid Sized companies at 12-18%. Mindtree seems to have no competitive advantage over its competitors. |
25
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what company does ,your story on company , why do you think that
company will become better than what it is today, or any other point
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Mindtree is a mid sized IT company.Company faced some challenges in
past and now it is recovering.
It has created a new brand entity by changing its logo.Company is now focusing on big client.Number of clients which were below 1 million USD in revenue has been reduced significantly, number of 20$ mn client are now 4 from 2 in q2 fy12.Share from top 5 client is increasing which shows increasing faith of big clients in the company |
4
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 Concerns: Company is impacted by dollar vs rupee alot.It posted a loss of 176Cr in 2009.It had forex loss of 41cr in Q2 fy13 Not getting big deals:Mindtree has to do lot of work before it can start getting big deals.It has just 4 clients which off more than 20$ mn revenue. Mindtree currently has pricing advantage, it has lower billing rates compared to big players but it could be in problem once big payers starts lowering billing rates to avoid losing clients. Mindtree look strong in mid cap IT space.Its quarterly results are much more predictable now.If the company can keep 3-4 quarters with positive growth then stock can demand P/E of 12-14. Long term story of the company looks promising. Company can give 15-20% return annually over next few years if growth momentum continues |
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