4QFY2012 Result Update | IT

April 16, 2012

MindTree
Performance highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

BUY
CMP Target Price
% chg (qoq) 1.2 9.9 149bp 13.8 4QFY11 391 44 11.3 32 % chg (yoy) 34.4 122.9 744bp 113.4

`488 `585
12 Months

4QFY12 526 99 18.7 69

3QFY12 520 90 17.3 61

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

IT 1,978 0.4 531/321 31,568 10 17,151 5,226 MINT.BO MTCL@IN

MindTree reported modest results for 4QFY2012, with OPM and PAT coming in ahead of ours as well as streets expectations. The company reported a 4.9% qoq increase in volumes. MindTree has been one of the good performers on the revenue as well as margin front in the Indian IT mid-cap space, posting a 4.5% CQGR in its revenue over the past eight quarters. The company expects to post average industry growth in FY2013. We maintain our Buy rating on the stock. Quarterly highlights: For 4QFY2012, MindTree reported USD revenue of US$105mn, up merely 1.3% qoq, due to a 3.6% pricing decline because of bump-up in pricing in 3QFY2012, which got normalized in 4QFY2012. EBITDA margin improved by 149bp qoq to 18.7%, largely on the back of gains derived from lower employee costs. PAT came in at `69cr, up 13.8% qoq. Outlook and valuation: MindTree derives most of its IT services business (~66% of revenue) from growth verticals such as manufacturing and travel and transportation (T&T). BFSI vertical is witnessing slightly higher signs of pressure and caution. Management is confident that its IT services business would continue its momentum and has given offers to 3,000 campus graduates for FY2013, who are expected to join from May 2012. This would help MindTree to rationalize its employee pyramid and cushion its margins. Management expects the PES business to post almost double-digit revenue growth in FY2013. Overall, we expect the company to record an 11.5% and 13.1% CAGR in USD and INR revenue, respectively, over FY2012-14E. We expect the companys EBITDA margin to increase from 15.3% in FY2012 to 16.0% in FY2013. Further, we expect the company to record a 13.8% CAGR in its EBITDA over FY2012-14E. We value the stock at 10x FY2014E EPS i.e., with a target price of `585, and maintain our Buy rating on the stock. Key financials (Indian GAAP, Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010
1,296 4.7 215 310.8 18.9 54.4 9.0 2.9 32.0 26.8 1.4 7.4

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 24.1 9.5 17.7 48.7

Abs. (%) Sensex Mindtree

3m 5.9 13.8

1yr (11.5) 26.9

3yr 56.7 99.2

FY2011
1,509 16.4 102 (52.6) 11.8 24.9 19.6 2.6 13.1 13.7 1.2 10.3

FY2012
1,915 26.9 218 114.6 15.3 53.7 9.1 2.1 22.8 23.2 0.8 5.6

FY2013E
2,172 13.4 221 1.3 16.0 53.9 9.1 1.7 18.9 22.2 0.7 4.5

FY2014E
2,450 12.8 240 8.3 15.5 58.5 8.4 1.4 17.0 19.8 0.6 3.7

Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Mindtree | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 performance (Indian GAAP, Consolidated)

Y/E March (` cr) Net revenue Cost of revenue Gross profit SG&A expenses EBITDA Depreciation EBIT Interest expense Other income PBT Income tax PAT Minority interest Share in profit of associates Adj. PAT EPS Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

4QFY12 526 318 208 109 99 17 82 0 1 83 14 69 69 16.8 39.5 18.7 15.5 13.1

3QFY12 520 332 188 98 90 17 72 0 1 73 13 61 61 14.9 36.1 17.3 13.9 11.6

% chg (qoq) 1.2 (4.2) 10.7 11.5 9.9 (2.9) 13.0

4QFY11 391 273 118 74 44 18 26 0 10

% chg (yoy) 34.4 16.3 76.6 48.7 122.9 (8.7) 216.7

FY2012 1,915 1,248 667 374 293 70 223 0 38

FY2011 1,509 1,015 495 317 178 71 107 0 24 131 29 102 102 24.9 32.8 11.8 7.1 6.6

% chg (yoy) 26.9 23.0 34.9 18.2 64.8 (2.4) 109.6

12.5 6.3 13.8 13.8 12.7 342bp 149bp 162bp 145bp

36 4 32 32 7.9 30.1 11.3 6.6 8.1

130.5 288.6 113.4 113.4 112.5 944bp 744bp 895bp 503bp

261 43 218 218 54.1 34.8 15.3 11.7 11.2

100.2 49.3 114.6 114.6 117.5 207bp 351bp 460bp 454bp

Exhibit 2: Actual vs. Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 526 18.7 69

Estimate 528 17.7 55

% Var (0.4) 104bp 24.4

Good performance yet again

For 4QFY2012, MindTree reported USD revenue growth of merely 1.3% qoq to US$105mn, due to a 3.6% pricing decline because of bump-up in pricing in 3QFY2012 (due to one-time transition revenue realized from a package implementation deal in Europe), which got normalized in 4QFY2012. Volume growth, however, was strong at 4.9% qoq. In INR terms, revenue came in at `526cr, up 1.2% qoq.

April 16, 201

Mindtree | 4QFY2012 Result Update

Exhibit 3: Trend in revenue growth (qoq)

110 100 9.5 7.3 92.5 86.3 2.3 1.3 1QFY12 2QFY12 3QFY12
qoq growth (%)

10 103.7 105.0 9 8 7 5 4 3 2 1 0 6

101.3

(US$ mn)

80 70 60

1.2

4QFY11

4QFY12

Revenue (US$ mn)

Source: Company, Angel Research

Service verticals wise, the companys growth was led by traditional IT services and its anchor service offerings such as application development (contributed 40.8% to revenue), application maintenance (contributed 23.4% to revenue) and independent testing (contributed 17.9% to revenue), revenue of which grew by 3.9%, 0.9% and 11.3% qoq, respectively. Revenue from discretionary services such as consulting and IP licensing and package implementation declined by 6.8% and 27.1% qoq (such huge decline due to high base effect on account of one timerevenue realization in 3QFY2012), respectively. Also, revenue from infrastructure management and technical support service declined by 5.5% qoq during the quarter.

Exhibit 4: Growth trend in service verticals

Particulars Application development Application maintenance Consulting and IP licensing Package implementation Independent testing Infrastructure mgmt. and tech. support
Source: Company, Angel Research

% to revenue 40.8 23.4 4.6 3.6 17.9 9.7

% chg (qoq) 3.9 0.9 (6.8) (27.1) 11.3 (5.5)

% chg (yoy) 15.8 19.2 40.0 37.0 22.5 44.1

Industry wise, revenue from total IT services (ITS) during the quarter grew by 1.8% qoq. In ITS, the major growth driver again was T&T, revenue of which grew by 8.7% qoq. Revenue from BFSI and manufacturing increased by 2.8% and 1.3% qoq, respectively. Product engineering services (PES) reported merely a 0.4% qoq increase in revenue during the quarter. Management indicated that PES business is expected to post almost double-digit growth in FY2013. Management also indicated that it is seeing increased signs of caution and pressure from its BFSI clients.

April 16, 201

(%)

90

Mindtree | 4QFY2012 Result Update

Exhibit 5: Growth trend in industry segments

Particulars ITS Manufacturing BFSI T&T Others PES
Source: Company, Angel Research

% to revenue 15.4 21.2 13.2 17.4 32.8

% chg (qoq) 1.3 2.8 8.7 (3.7) 0.4

% chg (yoy) 17.2 27.2 37.4 52.4 4.8

Geography wise, India and U.S. emerged as the major growth areas for the company, as revenue from these regions grew by 5.5% and 3.3% qoq, respectively, during the quarter.

Exhibit 6: Growth trend in geographies

Particulars U.S. Europe India Rest of World
Source: Company, Angel Research

% to revenue 57.3 27.7 7.5 7.5

% chg (qoq) 3.3 (0.1) 5.5 (10.6)

% chg (yoy) 16.3 54.0 1.5 0.4

Hiring and utilization

During 4QFY2012, gross and net addition of MindTree stood at 502 and 66, respectively, taking its total employee base to 11,000. The company added 62 net employees in software professionals, whereas sales and support employee base witnessed addition of four people. Attrition rate (LTM basis) during the quarter decreased to 18.2% in 4QFY2012 from 19.4% in 3QFY2012. Management indicated that it has given ~3,000 campus offers for FY2013; the joining ratio of these is expected to be 70-75% and most of these are expected to join in 1HFY2012.

Exhibit 7: Employee metrics

Particulars Software professionals Sales and support Total employee base Gross addition Net addition Attrition LTM (%)
Source: Company, Angel Research

4QFY11 8,862 685 9,547 435 (124) 25.1

1QFY12 8,887 690 9,577 630 30 25.6

2QFY12 9,903 677 10,580 1,478 1,003 21.7

3QFY12 10,268 666 10,934 846 354 19.4

4QFY12 10,330 670 11,000 502 66 18.2

Utilization level, excluding as well as including trainees, declined to 72.1% and 67.8% in 4QFY2012 from 75.8% and 68.3%, respectively, in 3QFY2012. The company expects utilization level to move up going ahead, as strong fresher hiring done in FY2012 will start turning billable.

April 16, 201

Mindtree | 4QFY2012 Result Update

Exhibit 8: Utilization trend

80 78 76 77.7 75.8 72.9 72.5 70.9 71.3 68.3 67.8

(%)

74 72 70 68 66

72.5

72.1

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

Utilisation - incl. trainees

Utilisation - excl. trainees

Source: Company, Angel Research

Margin enhances
MindTree has been consistently improving its operating margins (excluding the benefit from INR depreciation) by gaining operational efficiency from broadening its employee pyramid. Currently, the number of employees with less than three years of experience in the company stands at ~36% as against 30% at the starting of FY2012. For 4QFY2012, MindTrees EBITDA and EBIT margins improved by 149bp and 162bp qoq to 18.7% and 15.5%, respectively, largely on the back of gains derived from lower employee costs.

Exhibit 9: Margin profile

45 40 35 30 25 20 15 10 5 0 6.6 4QFY11 6.8 1QFY12
Gross margin

36.1 30.1 30.1 32.3

39.5

(%)

17.3 11.3 11.1 12.9 13.9 9.1 2QFY12

EBITDA margin

18.7 15.5

3QFY12

4QFY12

EBIT margin

Source: Company, Angel Research

PAT came in above expectations at `69cr, up 13.8% qoq, on the back of healthy operating performance. Forex loss stood at `4cr in 4QFY2012 vs. `2.5cr in 3QFY2012.

April 16, 201

Mindtree | 4QFY2012 Result Update

Client pyramid
MindTree added six new clients during 4QFY2012. The company added one new client in the US$5mn-10mn revenue bracket and two clients in the US$1mn-5mn revenue bracket.

Exhibit 10: Client metrics

Particulars Active clients New clients added US$1mn-5mn US$5mn-10mn US$10mn plus
Source: Company, Angel Research

4QFY11 277 39 53 8 6

1QFY12 283 25 53 7 7

2QFY12 270 15 55 10 7

3QFY12 258 9 58 9 7

4QFY12 237 6 60 10 7

Outlook and valuation

MindTree derives most of its IT services business (~66% of revenue) from growth verticals such as manufacturing (~15% to revenue) and T&T (~12% to revenue). BFSI (~21% to revenue) vertical is witnessing slightly higher signs of pressure and caution. Management is confident that its IT services business would continue its momentum and has given offers to 3,000 campus graduates for FY2013, who are expected to join from May 2012. This would help MindTree to rationalize its employee pyramid and cushion its margins. Management expects the PES business to post almost double-digit revenue growth in FY2013. MindTree also reiterated the fact that guidance number of Infosys pointed out that growth in FY2013 is expected to be back-ended and the first two quarters are expected to be muted. Overall, we expect the company to record an 11.5% and 13.1% CAGR in USD and INR revenue, respectively, over FY2012-14E. On the margin front, MindTree has been doing well since the past few quarters to rationalize its employee pyramid and cut down on SG&A. These moves by the company as well as INR depreciation helped MindTree to improve its margins from 11.8% in FY2011 to 15.3% in FY2012. The move of rationalizing the employee pyramid has helped the company shift its employee pyramid significantly, with employees having less than three years of experience currently standing at ~36% of the total employee base as against 30% at the starting of FY2012. Going ahead, for FY2013, MindTrees margins would face headwinds of wage inflation, which can be partially absorbed by tailwinds from factors such as improving utilization level, effort shift offshore and lowering SG&A from current levels. Hence, we expect the companys EBITDA margin to increase from 15.3% in FY2012 to 16.0% in FY2013. Further, we expect the company to record a 13.8% CAGR in its EBITDA over FY2012-14E. At the CMP of `488, the stock is trading at 8.4x FY2014E EPS of `58.5. We value the stock at 10x FY2014E EPS, i.e., with a target price of `585, and maintain our Buy rating on the stock.

April 16, 201

Mindtree | 4QFY2012 Result Update

Exhibit 11: Key assumptions

Particulars Revenue growth-USD terms (%) USD-INR rate Revenue growth-INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2013 10.1 49.0 13.4 16.0 22.0 0.4

FY2014 12.8 49.0 12.8 15.5 24.5 8.4

Exhibit 12: One-year forward PE(x) chart

1600 1400 1200 1000 800 600 400 200 0

(`)

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11
4x

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Price
Source: Company, Angel Research

24x

19x

14x

9x

Exhibit 13: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Entp. KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Buy Neutral Buy Neutral Buy Accumulate Buy Accumulate Buy Accumulate Buy Accumulate Accumulate CMP (`) 487 127 2,369 166 76 79 488 383 48 325 1,070 711 421 Tgt. price (`) 562 2,792 98 89 585 433 61 352 1,360 750 463 Upside (%) 15.5 17.8 28.9 12.9 19.8 13.2 27.5 8.3 27.1 5.5 10.0 FY2014E EBITDA (%) 16.5 18.3 30.6 16.8 14.9 15.0 15.5 17.9 16.9 20.8 28.9 15.7 19.3 FY2014E P/E (x) 11.7 12.2 13.6 9.1 7.0 9.5 8.4 9.3 5.2 8.3 15.3 8.2 13.9 FY2011-14E EPS CAGR (%) 15.8 53.4 13.4 12.9 (1.4) 25.3 32.9 1.7 18.0 3.8 16.1 20.8 11.8 FY2014E RoCE (%) 19.8 24.1 22.8 16.6 20.0 11.4 19.8 14.1 11.5 16.1 30.6 12.9 14.1 FY2014E RoE (%) 20.8 21.6 20.8 13.2 18.0 13.0 17.0 13.7 19.0 13.8 29.9 18.0 19.3

Source: Company, Angel Research; Note: ^Valued on SOTP basis

April 16, 201

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Mindtree | 4QFY2012 Result Update

Profit and loss statement (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales S/w development exp. % of net sales Gross profit % of net sales SG&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Interest expense, net Other income, net Profit before tax Provision for tax % of PBT PAT Minority interest Share in profit of associates Adj. PAT EPS (`) FY2010 1,296 798 61.6 498 38.4 252 19.5 246 18.9 65 180 3 77 255 40 15.6 215 215 54.4 FY2011 1,509 1,015 67.2 495 32.8 317 21.0 178 11.8 71 107 0 24 131 29 22.1 102 102 24.9 FY2012 1,915 1,248 65.2 667 34.8 374 19.5 293 15.3 70 223 38 261 43 16.4 218 218 53.7 FY2013E 2,172 1,409 64.9 763 35.1 415 19.1 349 16.0 87 262 22 284 62 22.0 221 221 53.9 FY2014E 2,450 1,593 65.0 857 35.0 478 19.5 379 15.5 98 281 37 318 78 24.5 240 240 58.5

April 16, 201

Mindtree | 4QFY2012 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) Liabilities Share capital Application money Reserves and surplus Total shareholders' funds Minority interest Secured loans Unsecured loans Total debt Total liabilities Assets Gross block - fixed asst. Acc. depreciation Net block Capital WIP Total fixed assets Goodwill Investments Deferred tax assets, net Current assets Sundry debtors Cash and bank balance Loans and advances Total current assets Less:- Current liabilities Current liabilities Provisions Net current assets Total assets 211 49 224 674 181 53 345 781 298 72 276 964 274 83 390 1,181 306 93 567 1,416 237 52 195 484 283 46 251 579 408 60 179 647 393 85 269 747 443 179 343 965 515 253 261 25 286 15 127 21 562 262 301 3 303 111 22 671 331 339 9 348 308 32 819 418 400 12 412 350 28 899 516 382 15 398 400 52 40 631 671 3 3 674 40 736 776 5 5 781 41 917 957 4 3 7 964 40 1,133 1,173 4 4 8 1,181 40 1,368 1,408 4 4 8 1,416 FY2010 FY2011 FY2012 FY2013E FY2014E

April 16, 201

Mindtree | 4QFY2012 Result Update

Cash flow statement (Indian GAAP, Consolidated)

Y/E March (` cr) Pre-tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets (Inc)/dec in intangibles (Inc)/dec in minority interest Cashflow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilised) Cash at start of the year Cash at end of the year (11) (48) (59) 221 (55) (26) (2) 131 (33) 15 (136) (82) (14) (232) 4 49 52 (101) (26) (127) 46 (89) 16 (0) 15 (57) 2 15 (12) 5 (6) 52 46 (53) 136 83 371 (114) (197) (11) (321) 3 (33) (5) (35) 14 46 60 (76) (14) (89) 219 (152) (42) 4 (190) 1 (0) (5) (4) 25 60 85 (124) 42 (82) 256 (83) (50) (24) (157) (5) (5) 94 85 179 FY2010 178 65 243 77 320 40 280 FY2011 106 71 178 24 202 29 173 FY2012 223 70 293 38 331 43 288 FY2013E 262 87 349 22 371 62 308 FY2014E 281 98 379 37 416 78 338

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Mindtree | 4QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 4.5 73 114 5.0 63 71 5.5 66 70 5.3 66 71 6.2 66 70 26.8 39.7 32.0 13.7 17.2 13.1 23.2 38.0 22.8 22.2 35.7 18.9 19.8 34.2 17.0 0.8 1.4 0.1 1.9 1.0 32.0 0.8 1.2 0.1 1.9 1.0 13.1 0.8 1.2 0.1 2.0 1.0 22.8 0.8 1.1 0.1 1.8 1.0 18.9 0.8 1.1 0.1 1.7 1.0 17.0 54.4 70.9 11.8 170 24.9 42.3 10.0 190 53.7 70.8 4.0 235 53.9 75.7 4.0 288 58.5 83.0 4.0 346 9.0 6.9 2.9 2.4 1.4 7.4 2.7 19.6 11.5 2.6 2.0 1.2 10.3 2.4 9.1 6.9 2.1 0.8 0.8 5.6 1.7 9.1 6.5 1.7 0.8 0.7 4.5 1.3 8.4 5.9 1.4 0.8 0.6 3.7 1.0 FY2010 FY2011 FY2012 FY2013E FY2014E

April 16, 201

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Mindtree | 4QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

MindTree No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 16, 201

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