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Mind Tree

A1

 

 

Quality Grading:

 

2008

2009

2010

2011

2012

A2

B3

A1

A2

A1

 

Discussion & Analysis:

 

Mind tree’s performance has not been consistent looking at their intrinsic values behaviour and performance ratings for the last 5 years. The good part for this business is that they have not damaged their balance sheet quality rating (A) from last 5 years.

In last five years this is the first time that management has been able to add intrinsic value in the business consistently from the 2011 lows. The consensus report of the analysts expect a growth rate in its earnings to be 11% for the next two years which can take this business intrinsic value in 4 digits (Rs 1,086). If we invest today then we might get a return of 18% per anum for the next 2 years.

Positives

Negatives

As chairman reported in last annual report about the change in attitude from ‘Order takers’ to ‘order makers’ must be working for their business.

Not a consistent performance (In terms of creating value for the shareholders) by the management.

Strong revenue growth every year from last 5 years means their products are in demand.

86% of revenues come from USA and European countries so it all depends on the macro economies of those geographies (A recent analysis by many are suggesting that for the year 2013 there will be a growth in IT services products by this region).

37 businesses from global fortune 500 are their clients and with few they have been partnering from more than 10 years to build their business (Microsoft, Avis budget group and Unilever).

A very concentrated portfolio of their clients (Top 10 client contributes 44% of their revenues). A loss of business from top 10 contributors can impact to the profitability of this business.

Human resource strategy is working well to keep its employees attrition down to 13.7% from 18% last year (As per industry standard the attrition of employees is 12%).

Threat or Risk:

 

The biggest risk is in regards to its consistent profitability. They have been generating consistent returns from last 2 years but if management fail in doing so will result in loss of intrinsic value of their business (They should overcome this risk as we are witnessing growth in their revenues). It is important to keep a close eye on their performance every quarter and make sure that management is focused on adding value to their business.