Mindtree Ltd – Robust Business With Expensive Valuation


Company Name – Mindtree Ltd (Mindtree)


Current Share Price – INR 2,890 (July 8, 2022)


Market Cap – INR 47,637 cr

 

1. What is interesting about the stock?

Mindtree stock has strong performance and a rich valuation. Mindtree is a mid-tier IT company. It has expertise in infrastructure and applications catering to Global 2000 clients. It has leading margins (>20%) compared to other mid-tier IT companies.


Company Background

  • Mindtree, an L&T group company, is an international Information Technology consulting and implementation company that delivers business solutions and global software development through 42 offices across 24 countries including India, the United States of America (USA), Canada, the United Kingdom, Japan, Singapore, Australia, Germany, Switzerland, South Africa, UAE, Netherlands, France, Ireland, Poland and Republic of China

  • Mindtree is a digital transformation and technology services company, helping 275+ active clients from ideation to execution through 35,000 employees

  • For more than two decades, it has helped global enterprises marry scale with agility to achieve a competitive advantage across industry verticals

Business Overview

  • The company is structured into four industry verticals - Retail CPG and Manufacturing (RCM), Banking Financial Services and Insurance (BFSI), Travel, Transport, Logistics & Hospitality (TTH), and Communication, Media & Technology (CMT)

  • Offers services in the areas of analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, independent testing, infrastructure management services, mobility, product engineering, and SAP services, amongst others

Historical Growth Rate

  • The last 5 years’ annual growth rate for revenue is 15% and EPS is 32%

  • The last 10 years’ annual growth rate for revenue is 19%

Industry Overview

  • The proportion of IT spending on the shift to the cloud will speed up as an outcome of the COVID-19 crisis, with the cloud projected to make up 14.2% of the total global enterprise IT spending market in 2024, up from 9.1% in 2020. (Gartner)

  • 70.5% of organizations cite improved customer experience as the top factor driving their digital transformation. Going forward, it is expected that there will be greater acceptance of chatbots and AI-driven natural language processing bots which will increasingly embark on the business’s first- and early-stage interactions with customers. (NTT research)

  • Worldwide the cybersecurity market is set to grow by up to 10% in 2021 to top USD 60 Billion. (Canalys)

  • 85% of respondents indicated that an increased percentage of their company’s workforce will work remotely post-pandemic. In this scenario, continuous learning and reskilling are key to improving flexibility and business outcome. Companies are likely to increase their investment in their IT infrastructure, particularly those areas related to risk and crisis management, human capital management, customer experience, and health and safety. (Deloitte’s Q2 2020 CFO survey)

Key Differentiators or MOATs

  • Born digital: technology company set up 22+ years ago

  • Strategic partner: for transformation journeys across the digital value chain

  • Global footprint: presence across 24 countries enables Mindtree to be closer to its customers and businesses

  • Committed management team: strongly aligned with stakeholders’ interests

  • Strong financials

  • Company is net debt-free

  • Mindtree has been maintaining a healthy dividend payout of ~33%

  • Traction in multi-year deals client mining, scaling up existing clients to USD 50 million

  • Well-poised to clock industry-leading double-digit growth

  • Expected to maintain 20% plus margins

Management Quality

  • More than 2 years’ average tenure of the top management

  • Debashis Chatterjee serves as Managing Director, Chief Executive Officer, and Director of Mindtree Limited since August 2019. He served as Executive Vice President and President of Global Delivery at Cognizant Technology Solutions Corporation before this. He has also served as Global Leader for the Digital Systems and Technology practice at Cognizant

2. Key Historical Financials

  • Mindtree delivered strong results for FY22 - revenue growth of 32% and net profit growth of 49% on a YoY basis. Results were strong for Q4FY22 too

  • EBITDA margin was stable at 21% in FY22

  • Cash Flow Convertibility (CFO/EBITDA) came down in FY22 due to an increase in working capital

  • ROCE/ROE expanded in FY22

3. What is my view on company valuation?


Mindtree has a healthy order book, robust broad-based growth, and resilient Balance Sheet and is well-positioned to cater to a strong demand environment. The rebound from low economic activity has already been captured in the first 2 quarters of this year CY’21.


Company’s revenues are expected to grow faster than the industry average (~15% vs 12.5% on an annual basis) due to higher growth in cloud, data, and experience market segments.


In May 2022, Mindtree and L&T Infotech Limited (LTI) announced a merger where all shareholders of Mindtree will be issued shares of LTI at the ratio of 73 shares of LTI for every 100 shares of Mindtree. The transaction is subject to shareholder and regulatory approvals. So, the share price of Mindtree has got linked to the share price of LTI which is currently at INR 4,068 (Share price of Mindtree = 0.73 times the share price of LTI).


Valuation looks expensive at current levels:

  • PE vs Industry: Mindtree is expensive based on its PE Ratio (29x) compared to the Indian IT industry average of ~25x; even the PE multiple of LTI is 31x

  • PEG Ratio: Mindtree is expensive based on its PEG Ratio (~2x)

Long term investors could evaluate buying stock at lower levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Near-term challenges in terms of elevated subcontractors’ costs. The Company is looking to offset cost challenges through continued fresher hiring (2,000 freshers added in Q1 and Q2 FY22)

  • Attrition was elevated. The attrition rate for FY22 for the Company has gone up sharply to 23.8% vs 21.9% in FY21 and 12.1% in FY20. The management indicated that supply-side challenges are there but are short-term in nature

About the Author


I have more than 10 years of work experience in the Financial Services Industry. My educational background is ACA, MSc Finance, and BE (Electronics and Communication).


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

0 comments