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Edging ahead

Mindtree is perfectly positioned to benefit from the depreciating rupee, all it needs is a few bigger deals

Mindtree was founded in 1999 by 10 industry veterans who came together from companies like Wipro and Lucent Technologies. It reported a revenue growth of 23 per cent (y-o-y) in FY13, while profit was up 55 per cent. Mindtree is one of the very few mid-tier IT companies that have substantially improved their RoE -- from 16 per cent levels in FY11 to 30 per cent in FY13. This feat puts the company ahead of its peer group average RoE of 21 per cent.

How does the rupee depreciation help?

Around 95 per cent of the company’s revenues are from outside India. 70 per cent of that is dollar denominated. According to company policy, Mindtree hedges only 50 per cent of its net exposure over the next 12 months. Not hedging the entire expected proceeds thus allows it to take advantage of the rupee’s depreciation to a greater extent than its peers. According to Morgan Stanley, Mindtree stands to gain 15 per cent on its FY14E pre-tax earnings for every five per cent fall in the rupee.

Watch out for: Mindtree’s BFSI vertical, accounting for 22 per cent of revenues, is weighing it down. Though up 10.6 per cent on a y-o-y basis, BFSI fell 1.7 per cent compared to the immediately preceding quarter. Among other concerns, higher wage costs and visa fees could impact margins in FY14. Also, the company’s Product Engineering Services (PES) vertical will need to pick up.

A couple of large wins is what Mindtree needs to get into higher gear. At the moment, the company has limited large deals on hand and how fast the company manages to win $100 million plus deals will determine the speed of its growth going ahead. According to Standard Chartered Research, Mindtree should be able to see a 12.8 per cent jump in FY14 revenues on the back of $165 million total contract value (TCV) deal wins in the last quarter of FY13.