Stock Reivew: MindTree

MINDTREE, the Bangalore-based mid-sized IT services provider, has failed to earn returns on bourses in 2010. The sluggishness in its financials and the lack of major growth triggers have impacted its stock market performance. The stock is expected to remain under pressure in the near term since the company is less likely to report stronger year-on-year growth in the remaining two quarters of the current fiscal.

    MindTree offers IT services, software testing, infrastructure management, and product engineering to its global clientele. The company has aggressively pursued inorganic growth. Over 20% of its revenue comes from acquired businesses. The company's revenue in the last 12 months is 1,389 crore.

    Higher foreign exchange loss and volatile business environment were the key factors that impacted its performance over the last eight quarters. One concern is that while it has been adding new clients every quarter over the last three quarters at least, its total client base has not grown much.

    For instance, it added 114 new clients since December 2010 quarter but the total active client base increased by just eight during the period. This reflects the short-term nature of its projects, which restricts client penetration. A higher client penetration is desirable since it would shield the company from changes in the broader economic parameters.

    In the September quarter, the sequential growth in its sales and profits was remarkable mainly due to the relatively lower operating costs. On yearly comparison, however, the profits have declined, a reflection of the fact that the company is yet to report a significant turnaround in operations.

    Its future growth depends upon how well it can take advantage of the global demand recovery. According to its chief financial officer Rostow Ravanan, MindTree's clients have started ramping up projects.

    Also, the average deal size has improved by 6% to 10% in the IT services segment. This should help it grow again in the coming quarters.

    The high level of attrition may, however, come in the way of timely execution of projects. MindTree's attrition rate at 21% is higher than the industry average. The company has no plans to offer an interim salary raise. This may stoke more attrition since its larger peers are scrambling to increase their headcounts.

    At Wednesday's close of . 520, the stock trades at the trailing 12-month price-earnings ratio of 14, which is higher compared with the P/E range of 8-12 for mid-cap IT stocks.