Mindtree’s Profits Decline By 21%

Mindtree announced its results for the quarter ending March 2013 earlier today. In line with our estimates for the Indian IT sector, Mindtree reported moderate revenue growth and saw pressure on its margins.

Revenues for Mindtree grew sequentially by 2.82% to USD 113 million in Q4FY13. Meanwhile, volumes grew by 3.73% in the same period. Although these numbers seem decent, the margins of Mindtree and deal pipeline make the results quite bleak.

In the quarter under review, its EBITDA declined by 4.02% to USD 21.5 million and its net profit by 20.65% to USD 14.6 million. This translates into an EBITDA margin reduction of 135 basis points and a net profit margin reduction of 380 basis points, on a QoQ basis.

In terms of services, high sequential growth was witnessed from the areas of package implementation, IP led revenue and infrastructure management & tech support. These areas grew by 15.36%, 34.46% and 8.31% respectively. However, these 3 service areas together contribute to about 20% of Mindtree’s total revenues. Application development and maintenance together constitute to 46.9% of the revenues. These areas grew by 1.95%, thus moderating overall growth.

Mindtree has a uniformly distributed revenue stream from the verticals of Manufacturing & Retail, BFSI, Travel, Media & Services and Product Engineering Services. Revenues from these verticals witnessed sequential growth of 8.26%, -1.69%, 2.82% and 2.48% respectively.

Although there has been revenue growth and volume growth in Q4FY13, there has been tremendous pressure on the margins. Moreover, the company added 5 new clients in Q4FY13, taking the total number of active clients to 232, which is lesser than Q3FY13’s 245.

However, the company has given a positive sales outlook for FY14, helped by increased investment in sales and focus on the company’s top 40 clients. At the same time, the management expects a further decline in margins in Q1FY14 on account of higher visa related costs.

In the near-term, it looks like Mindtree will be able to maintain a momentum in sales growth. However, margins are likely to be pressured. We thus recommend investors to avoid investing in the scrip till the end of the next quarter, when the path of the company’s growth will become clearer.