We maintain our ‘outperform’ rating on Mindtree Ltd on improved revenue visibility now. We raise our FY14-16e EPS by 4-6% and the target price to R1,700 (earlier R1,350).
Mindtree remains a top mid-cap pick for us in the sector. We like the management quality. While valuations for many mid-cap companies look attractive, revenue visibility is important — and the company seems to have it.
The company reported strong Q2 numbers. While we were expecting strong sequential revenue growth of 4% ($ terms), actual revenue growth was even better at 5.4%. Ebit margins rose 260 bps q-o-q vs expectations for 190 bps q-o-q. Given the relatively high offshore proportion of revenue (59%), it is the most sensitive to the rupee fluctuations. It also recognises the exchange rate at the beginning of each month.
Consequently, it was a big beneficiary of the nearly 13% rupee depreciation that it witnessed in Q2. Net income dropped 5% q-o-q but was 17% ahead of estimates.
The better-than-expected forex line has helped. Europe and infrastructure management have been particularly strong. Mindtree added about 700 employees, taking the total to 12,941. Headcount is up 19% y-o-y. The interim dividend has increased from Rs 3 last year to Rs 5. Management expects increasing payout and to move to a quarterly one eventually.