DBFS RESEARCH. Mindtree Ltd. StRating - BUY. CMP - 1, Target Price - 1,416

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1 CMP - 1, Target Price - 1,416 Associate of Doha Bank EQUITIES INDIA Computer Software Analyst : Nina Sundaran research@dbfsindia.com Phone : StRating - BUY Stock Bloomberg Code Reuters Code Information MTCL: Natl India MINT.NS BSE Code NSE Code ISIN Equity Shares (m) Week Range(INR) MINDTREE INE018I /831 M.Cap. (INR b) M.Cap. (USD b) 1.6 Free float market cap (Crs) Sector Shareholding Pattern (%) COMPUTERS - SOFTWARE Sep14 Dec14 Mar15 Indian Promoter Foreign Promoter DII FII Others Stock Performance (6-Months) Mindtree's Q1 earnings surpassed expectations... Mindtree's Q1 earnings matched the street expectations. Company's net profit was reported at Rs Cr which showed a growth of 7.4% Q-o-Q led by forex gains despite lower margins. Revenue increased by 6.9 percent Q-o-Q to Rs Cr as compared to Rs Cr and the company have also crossed USD 150 million in revenues. Company's strategic pillars gives a positive outlook : While analyzing the recent past, we can witness the uncertainty and volatility in world economic markets. But the company with its disruptive technologies and evolving customer requirements helps to enable the company to grow faster and generate higher returns for the company's shareholders. Their focused approach helped them to deliver an industry leading performance with a revenue growth of 16.4% for FY and their customer satisfaction levels are at a record three year high. The company expect that they can sustain the growth in FY16 also. The pillars includes the following; Digital Transformation : Mindtree was born digital. They are helping the clients by using digital tools to elevate customer experiences, build streamlined technology solutions, and bring products and services to market faster in a cost-effective manner. Employer of Choice : Mindtree is providing a nondiscriminatory working environment and equal employment opportunities to employees. The employees wellness and wellbeing and their safe working environment vision guides the company keeping on the right track. Customer Centricity : Mindtree is always focused on the customer needs and this enabled them to become the partner of choice for their clients. With their new technologies such as cloud apps, machine intelligence and connected smart devices makes them stand out in the market place. Delivery Excellence : Mindtree is providing next generation delivery platform and with their digitalization, increased usage of automation and agile principles ensures their excellence in industry.

2 Financial snap shot Y/E March (Rs Cr) FY15 FY16E FY17E FY18E Net Sales 3, , , ,672.6 EBITDA , ,303.7 PAT EPS (INR) Growth (%) BV/Sh. (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Valuation Y/E March (Rs Cr) FY15 FY16E FY17E FY18E Book Value (Rs) Change (%) Price-BV (x) EPS (Rs) Change (%) Price-Earnings (x) Dividend Per Share Dividend Yield (%) Valuation is trading at INR 1,225.5 and we arrived at a target price of INR 1,416 by using DCF method of Gordon growth model implies an upside of 15% from the CMP. Currently trades at 18.9x FY15 earnings and we value at 15.5x FY16E EPS. Company's Q1 earnings soars over than the expectation. Company Overview Mindtree limited is a public limited multinational company founded in 1999 and it headquartered in Bengaluru, India and New Jersey. It delivers digital transformation and technology business solutions through global software development. The Company globally deals with more than 200 clients and offices in 14 countries including United States of America, United Kingdom, Japan, Singapore, Malaysia, Australia, Germany, Switzerland, Sweden, UAE, Netherlands, Canada, Belgium, France, Ireland, and. Republic of China.. It specializes in e- commerce, mobility, cloud enablement, digital transformation, business intelligence, data analytics, testing, infrastructure, EAI and ERP solutions. The Company offers various services like: Application Development & Maintenance, Data Analytics, Digital Services, EAI BPM, Engineering R&D, Enterprise Application Services, Independent Testing, Infrastructure Management Services and IT strategy and consulting.

3 Midcap Company Mindtree's Q1 Analysis : The software services provider has reported a forex gain of Rs 20.2 crore during June quarter against loss of Rs 13 crore in March quarter. The operating profit dropped 3.2% sequentially to Rs crore and margin declined 189 basis points to 17.61% due to wage hikes in June quarter. The company's 12 months attrition rate was 18.4 percent. MindTree has acquired 100% equity interest in two overseas companies - US-based Relational Solutions and UK-based Bluefin Solution. The company also recommended an interim dividend of Rs 3 per equity share for the quarter ended June 30, Particulars (Cr) Jun '14 Sep '14 Dec '14 Mar '15 Jun'15 Net Sales/Income from operations Other Operating Income Total Income From Operations EXPENDITURE Employees Cost Depreciation Other Expenses P/L Before Other Inc., Int., Excpt. Items & Tax Other Income P/L Before Int., Excpt. Items & Tax Interest P/L Before Exceptional Items & Tax Exceptional Items P/L Before Tax Tax P/L After Tax from Ordinary Activities Prior Year Adjustments Extra Ordinary Items Net Profit/(Loss) For the Period Equity Share Capital Reserves Excluding Revaluation Reserves Equity Dividend Rate (%) Basic EPS Diluted EPS

4 Is Attrition badly affecting company's growth? Company's attrition rate in this fiscal stood at 14.23% which was increased comparing to 13.0% in FY14. Mindtree, which added 900 employees during the quarter on a gross basis dropped from 1,517 employess, said trailing 12 months attrition rate was 18.4% which was increased by comparing 18.2% in previous quarter. The total employees stood at 14,427 as against 14,202 employees on 31st march Employees cost in Q1 increased to Rs Cr from Rs Cr Q-o-Q. The capital employed increased steadily and it stood at 2048 in FY15 as against 1660 in FY14. Natarajan, the CEO said certain exits are bound to happen as the company is preparing itself for its 2020 vision. We restructured our organization to prepare it for the next three-five year. When you do such a transition, there will be some fall-outs. However, I want to categorically say that this is a zero cause of worry for us as we are very fortunate because of the company s depth of leadership,. From the CEO's vision, it is very clear that the attrition won't affect the company as much as expected.

5 Sales pipeline boosted the profitability : The net sales of the company over the last 5 years is constantly increasing. The net sales in this fiscal stood at Rs. 3,562 Crs as against Rs. 3,032 Cr in FY14 with a growth of 17.5 %. The EBITDA Margin is 21.7%. The PAT in this fiscal is Rs. 536 Cr which shows 19% growth over Rs. 451 Cr in FY14. We estimated a 22% growth of Rs. 656 Cr in FY16E. Global economic growth was 3.4 % in FY14 and is projected to reach 3.5 % and 3.8% in FY15 and FY16, respectively. IT Industry : IT industry is now in a downgraded range. All the blue chip companies are facing challenges like visa problems, salary to employees. The uncertainty, volatility and the macro economic factors are affecting the productivity and profitability of the industry. But as per the economic cycle, whenever we see a down swing in economy we will see an upward swing later. So there is a chance for the recovery. India is strongly positioned to gather more market share in the global IT-BPM services sourcing market and expect this to reach its goal of USD 300 billion revenues by At the same time, the stakeholders will need to be addressed about the challenges around economic volatility, protectionism, competition and customer centricity. From an IT services industry perspective, Digital business is estimated to touch $ 225 billion by 2020 with $ 48 billion predicted for Indian IT services firms.

6 SWOT Analysis of Digital business Expert guidance Customer Centricity Strengths Opportunity Innovative business models Corporate governance Alliance & partnerships SWOT Analysis Legislation on outsourcing Pricing pressures & Foreign currency rate fluctuations. Key client loss. Threats Uncertain economic environment Operations risk. Competition Weakness

7 Dividend: The Board of Directors, at its meeting held on April 16, 2015 recommended a final dividend of 100% (Rs 10 per equity share of par value Rs 10 each) for the year ended March 31, Accordingly, the cumulative dividend declared by the Board of Directors for the year ended March 31, 2015 aggregates to 170% (Rs 17 per equity share of par value Rs 10 each). The company also recommended an interim dividend of Rs 3 per equity share for the quarter ended June 30, The dividend payout ratio has increased steadily from 7% in FY12 to 27% in FY15 and we expect the payout to be 33.0% in FY18E. Source : Company, DBFS Research Company s priorities for FY15-16: Mindtree is fully focused on becoming the leading digital transformation partner for their clients, and on delivering high customer satisfaction. Their corporate governance practices have endeared them around their clients. Currently a third of the company s revenue is driven by providing digital services. IT Industry is on the optimistic view that 90% of all incremental spend in the next five years on IT will be on Digital. So the company s vision is to Make Businesses Digital. Mindtree has also reorganized its team with a focus on faster time to market and turnkey cloud-based solutions to make Digital real for its customers.

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9 Financials & Valuations Balance Sheet Y/E March (Rs Cr) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Share capital Reserves and surplus , , , , , ,217.2 Networth , , , , , ,300.9 Minority Interest Loan Capital Employed , , , , , ,437.9 Gross Block , , , ,717.9 Less; Dep Net Block Capital work-in-progress Investments Current Assets , , , , , ,090.5 Current investments Debtors Cash and bank balances ,191.7 Loans and advances Other current assets Current Liabilities & Provisions ,010.6 Net Current Assets , , , , ,079.9 Deferred tax assets (net) Application of funds. 1, , , , , , ,448.1 Income Statement Y/E March (Rs Cr) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Sales 1, , , , , , ,672.6 Change (%) Cost of services 1, , , , , , ,078.1 SG&A Expenses , ,290.8 EBITDA , ,303.7 % of Net sales Depreciation and amortization expense Interest Other income EBIT , ,317.5 Tax Rate (%) PAT Change (%)

10 Cash flow (Abstract) Y/E March (Rs Cr) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net profit before Tax , ,317.4 Depreciation (inc)/dec in Current Assets (inc)/dec in current Liabilities CF from operations ,066.0 Other Investments (Purchase)/Sale of Fixed Assets CF from investing Activities Inc / (Dec) in Equity Capital Inc / (Dec) in sec.loan Funds Dividend & Dividend tax Interest Paid on Loans CF from Financial Activities Cash generating during the year Opening cash balance ,137.1 Exchange rate differences Closing cash ,191.7 Key Ratios Y/E March (Rs Cr) E 2017E 2018E Per share data (Rs) EPS BV DPS Profitability Ratios ROE ROCE EBITDA Margin EBIT Margin Net margin Operating revenue/total Income Other Income/Total Income Turnover Ratios Debtors Fixed Asset Turnover Investments Turnover Total assets Turnover Liquidity & solvency Ratios Current Ratio Debt Equity Ratio Cash Flow Indicator Ratios Dividend Payout Ratio Retention Ratio

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