Mindtree’s (MTCL) Q1 revenues grew 4.8% q-o-q to $154 million while ebit margins slid 190 bps q-o-q to 14.3% on higher visa costs. Growth was broad-based, with BFSI/manufacturing verticals outperforming at 11%/6.3% q-o-q. Region-wise, US revenues grew 11.2% q-o-q, strongest since Q2FY14, while Europe slid 1.2% q-o-q due to forex losses.The company won deals worth TCV of $208 million in the quarter, mostly renewal in nature. We expect MTCL to beat industry growth on an organic basis even as S&M costs and acquisitions pull down near-term margins. We pare our FY16/FY17 EPS by 8.4%/7.3% to build in softer margins. Valuations at 15x FY17e P/E are not cheap. We recommend ‘hold’ rating with a rolled over Sept’16 target price of R1,300 (unchanged).
MTCL acquired the UK-based Bluefin for $63 million or 1.5x EV/sales, to build capability in SAP, particularly the HANA platform. Bluefin’s margins are lower than MTCL’s given its onsite-heavy consulting mix. It has a headcount base of ~170 and provides MTCL access to 60 clients. MTCL also completed a small tuck-in acquisition of IP-based Relational Solutions for $ 10 million (or 3x EV/sales).
MTCL continues to outperform on growth and is making heavy investments in sales and enhancing its capabilities (via acquisitions). While we like the growth execution, near-term margin headwinds remain and valuations at 15x PE are rich.