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Monday, October 26, 2009

MindTree Ltd:Future growth outlook and growth potential

Scripscan:MINDTREE LTD
cmp:570
Code:532819

Story:MindTree offers both IT and R&D services, catering to a wide range of clientele. Traditional services such as application development and maintenance (ADM), package implementation, testing and the like are delivered to clients across four-five verticals. MindTree also works on product-realisation services with clients who produce storage and server systems, consumer appliances, communication systems and automotive systems.This mix of IT-R&D services is around 80:20 in terms of revenue contributions to the company. Over the long run, R&D services have the potential to lead to IP-led revenues that are not linked to the manpower added and, therefore, may provide scope for margin expansion.In terms of vertical-mix, MindTree is also favourably placed, given the current problems in the financial sector. Manufacturing contributes 27 per cent of the revenues, BFSI (26.4 per cent) and travel and transportation (20.4 per cent); clients are other important contributors. For instance, in the manufacturing segment, MindTree works in areas such as distribution planning and sales routing, business intelligence, and trade promotion data management to give feedback to product managers. In the BFSI, the company is quite selective in the way it operates.ADM services contribute nearly 75 per cent of its revenues. Though these command lower billing rates, they are non-discretionary in nature.HUL, ICICI Bank, ING Vysya and Titan Industries are some of MindTree’s major clients in India. Over the past year, MindTree has been pursuing deals in the government and Defence segments.It has also participated in the e-governance initiative, with a large project for the Rajasthan Government for citizen services.Other assignments include work done for the Chief of Army Staff and the Deputy Chief of Army Staff and a consulting assignment to manage the logistics of a war.India contributes around five per cent of Mindtree’s overall revenues and the company hopes to enhance this. The company is eyeing more such deals and gain from government spends on IT enablement.Investments with a one-two year perspective can be considered in the shares of MindTree, considering its relatively strong business positioning among mid-tier IT companies and reasonable valuations. Given the current difficult macro-environment where clients tighten IT spends and demand more value for money, MindTree may be one of the best-placed players in the mid-tier segment to weather the crisis. The company’s focus on applications delivery to the key areas of operations of the various verticals that it operates in, lends confidence in the current difficult macro-environment.MindTree’s blended offering of IT and R&D services, better revenue visibility on a wider vertical-mix, and an increasing domestic presence, would help it to quote at a premium viz-a-viz to its peers.MindTree resembles any of the top-tier IT players in terms of service offering, but operates on a smaller scale. This apart, improvements in several key operating metrics and opportunities in areas such as testing, after the Aztecsoft acquisition, are positives for the company over the long run.

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