VR Logo

Margin Gains

Mindtree is one of the mid-cap IT players that have managed to improve their earnings…

At a time when the biggies are struggling to maintain margins, a group of mid-cap IT firms with scale and smaller projects on their side have been able to actually improve the returns they earn. Mindtree is one such company. Due to operational efficiencies, Mindtree has managed to push up its Ebitda margins from 11.1 per cent in Q1FY12 to 20.2 per cent (Q1FY13).

Volume and pricing flat: Volumes and pricing for the company in its most recent quarter (Q1FY13) were flat – growing at only 0.4 per cent (q-o-q) owing to a 0.2 per cent (q-o-q) increase in volumes. IT Services reported a growth of 3.1 per cent (q-o-q) while PE Services (PES) declined 5.1 per cent. Execution of a number of projects over the last couple of quarters has started to show results. Onsite volumes were up 5.6 per cent (q-o-q) compounded over the last four quarters.
The company has been rationalising deals in its PE Services segment, reducing seven low return accounts during the last quarter. This has helped shore up products engineering services (PES) margins for Mindtree from 7.7 per cent in Q1FY12 to 20.2 per cent in Q1FY13. With two sub $10 million orders in hand in the PES segment, this category should help Mindtree’s margins and growth trajectory in the future.

Stable pricing and wage hikes: Offshore pricing declined 3.5 per cent (q-o-q) in Q1FY13 on the back of a change in product offering mix. ADM and IMS saw a growth of 3.5 per cent (q-o-q) and 16 per cent respectively. According to the company, the current pricing is stable at the moment.

Margin gains: The company gained 2.3 per cent in margins because of a weak rupee but a 100 basis point impact of wage hike dulled its impact. Mindtree has executed wage hikes to 80 per cent of its workforce with effect from June 2012. In the next quarter, 18 per cent of the employees would get their hikes and the remaining 2 per cent in October. The impact of this wage hike would be visible from Q2 of the current financial.

Potential forex losses: Perhaps the company’s most immediate concern is the probable impact of dollar hedges going forward. Mindtree has outstanding hedges to the tune of $122 million at an average rate of Rs 50.31 for the next three quarters. With the rupee at Rs 55 levels, the company stares at a large potential forex loss. According to analysts, that loss could be in the range of around Rs 60 crore spread over the next three quarters.

Outlook and valuations: Given that internal restructuring and the fact that the company is ready to expend low yielding projects, the outlook for PES looks upwards. The RoCE for this debt-free company stands at 30 per cent. Mindtree trades at a PEG of 0.37.