Stock Review: MindTree

 

 

The stock of Bangalore-based IT company MindTree rose over 18% during intra-day trading on Thursday to its four month peak of . 426. The news of a partial stake sale by the former MindTree chairman Ashok Soota propelled the stock. A possibility of such a sale by Mr Soota was a concern among investors after his decision to quit in March 2011. The stock had fallen over 40% since then. Mr Soota sold 5.5% of his holding in the company at nearly 18.5% premium to the stock's closing price of . 361 on the previous day. He is expected to sell his balance 5.9% holding in the coming months. MindTree, which grossed . 1,500 crore in revenue during FY11, offers IT services and product engineering solutions. While the IT services division has seen some demand growth in the past, the engineering segment continues to face challenges. The IT division reported 30% growth in FY11. For the current fiscal, the management has hinted a faster-than-average industry growth expectation of 16-18%. Its products division will take a few more quarters to resume growth. MindTree's operating profitability nearly halved to 11.6% in FY11 on account of restructuring of one of its products division. It had invested $4.5 million in a new smartphone and telecom infrastructure products business, but later took a $3.7 million one-time charge to restructure the division. To improve its margin profile, MindTree is focusing on cost efficiency measures such as higher employee utilisation and higher share of recruits with less than three years of experience. It plans to add 2,000-2,250 employees in FY12, of which two-thirds will be freshers.

The effect of these initiatives is likely to reflect in the December 2011 quarter performance. However, currency fluctuations may impact the overall margin improvement. At the Thursday's close of Rs 392.7, Mind-Tree's stock trades at 15.6 times its FY11 earnings. The Thursday's price jump has made its valuation expensive when compared with the average P/E range of 8-12 for the mid-tier IT firms. Due to this, a further upside in the stock looks limited not withstanding the expected improvement in its margins.