Fundamental Analysis of Mindtree Ltd

In this article, we will do a fundamental analysis of Mindtree Ltd, as usual, we will cover the company and the management of Mindtree Ltd, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if Mindtree ltd is fundamentally strong or not then we will do the valuation analysis of Mindtree Ltd to decide if it is worth investing in the company at current levels or not.

Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.

Introduction

Mindtree Ltd is an Indian information technology and outsourcing company headquartered in Bangalore, India, and New Jersey USA.
It provides digital transformation and technology services from ideation to execution stage for multinational businesses the company was taken under the l&t through a hostile takeover in 2019.
l&t has unmatched capabilities across technology engineering construction and manufacturing and maintains leadership in all its major lines of business.
As the ratings are based on long-term past performance. They are relevant for at least three years in the future until FY 2022.

Also Read: Praj Industries Stock Fundamental Analysis & Fundamental Analysis of Deepak Nitrite

Fundamental Analysis of Mindtree Ltd is differentiated into different categories are as follows, all units are in millions except ratios and per share data.

Economic Model

The company operates in the IT and digital services industry where market dominance is achieved through scale workforce technical know-how and digital infrastructure on the scale side the company has 307 plus clients out of which 13 plus belong to fortune 100.
The company has a total of 41 plus offices in 18 plus countries and the Revenue Breakup of the company is as follows: 77% is from the USA, 15% is from Europe and 8% is from APAC.
On the workforce front, the company employs around 22 000 plus professionals and 764-plus bots for automation.
The employee utilization is 76.5 and attrition stands at 17.4 which is one of the lowest in the industry.
The company has established experience in solution architecture projects and program management.
Now with the backing of the l&t group the company is looking forward to costing synergy along with market expansion which will drive growth and profitability in the future.
Overall the company still does not have a wide economic model therefore this category gets three stars in Mindtree fundamental analysis.

Business Model and Management

Fundamental Analysis of Mindtree Ltd — Business Model

The company provides digital solutions including e-commerce cloud data warehousing (ERP) and digital transformation services to its clients.
The customer base is such the company has only 100 million dollar revenue clients, 150 million dollar clients, 525 million dollar revenue, clients.
It also has 47 and 134 clients in 5 million and 1 million categories respectively.
The business model is such that the company is focused on the developed markets and the majority of the revenue around 92 percent comes from the USA and Europe.
The revenue distribution is such that the top client contributes 24.8% of the revenue and the top 10 contributes 47.4% on the industry front, 43% of revenue is from the high-tech and media industry 20.4% is from BFSI.
20.3% is from retail and manufacturing and 16.2% is from the travel and hospitality sector.
Overall the business model is not well diversified across clientele and geography however after the takeover from l&t
The company can focus on the niche segments and geographies to grow organically.

Management of Mindtree

Mr. Debash’s Chatterjee is the CEO and managing director of Mindtree
He has over 30 plus years of experience in the field of IT, managing large business unit’s strategic alliances.
He was appointed to integrate the company under the l&t.
Mr. Dayapatra Nevatia is the Executive Director and Chief Operating Officer and has two-plus decades of experience across companies like Accenture, and Wipro.
Overall the company has new management which has to integrate the business after a hostile takeover during the uncertain times of the covid 19 outbreak this is a cause of concern for the investors.
Therefore this category gets three stars in the Mindtree fundamental analysis.

Also Read: Fundamental Analysis of Newgen Software & Fundamental Analysis of Happiest Minds

Company Financials

Company Financials of Mindtree Ltd are as follows:

Growth Ratios

The revenue has shown a growth of 20.6% CAGR over the last 10 years.
The operating income and net income have also grown at 19.4% and 15% cagr respectively.
This shows declining efficiency for the company.
The working capital is also positive and has shown linear growth capital expenditure has also slightly increased with scale.
Therefore this category gets five stars in mind tree fundamental analysis.

Profitability Ratios

The gross margin has been declining over the years which indicates the increasing cost of services delivered.
The other margins along with return on assets have also seen some recovery since FY 2017.
The profit margins will get affected due to some extraordinary expenses during the covid 19 outbreak period
Therefore this category gets four stars in Mindtree fundamental analysis.

Cash Flow Ratios

The net income margin along with CAPEX as a percentage of sales have seen a slight improvement in recent years.
The free cash flow as a percentage of net income has been positive and the operating and free cash flow growth rate has recovered this overall indicates a solid cash flow position for the company.
Therefore this category gets five stars in the fundamental analysis of Mindtree.

Liquidity and Solvency Ratios

The current ratio is well above the minimum requirement of one which indicates that the current assets are more than enough to meet the short-term obligations.
The quick ratio has also seen significant improvement in recent years this indicates good liquidity in the company.
The financial leverage and debt-to-equity ratio have been flat as the company does not have any long-term debt in its capital structure.
The profitability has also shown recovery which indicates improving solvency for the company therefore this category gets five stars in the fundamental analysis of Mindtree.

Efficiency Ratios

Overall the business efficiency has not seen any significant changes over the years and this is because of the nature of the business.
The payables period has increased from 7 to 20 days along with the receivables days from 73 to 78 days.
The cash conversion cycle has also not seen any significant changes over the years and still remains positive.
Therefore this category gets four stars in Mindtree fundamental analysis.

ROE and ROCE

The financial leverage has been stable over the years and the asset turnover has seen some improvement.
The company does not have any long-term debt so the interest burden ratio is almost 100.
The operating margin has seen a small decline over the years but has shown signs of recovery.
Overall the company has managed to deliver an improving return on equity due to increased asset turnover and profitability.
Therefore this category gets five stars in Mindtree fundamental analysis.

Future Growth Prospects

Some insights for the coming years from the analysis management discussions and con calls are as follows:
The impact of covid 19 would not be significant on existing business except for some extraordinary expenses.
The company however has a large exposure to the travel and hospitality sector which is severely impacted due to the global shutdown amongst the covid 19 crisis this can result in some contractual losses in the near future.
The new management is looking forward to margin improvements in the near future since the last few quarters the margins have expanded by 260 basis points this was led by operational improvement 140bp currency 50bp and some projects moving from the transition stage to steady stage 70bp historically.
The company’s revenue portfolio was more inclined towards project-based deals with shorter sales cycles.
Now the focus is now changing towards more annuity-based deals with continuous year-on-year revenue generation.
Last year’s top client revenue grew by 14% on a sequential basis.
The company believes that engaging in multiple business lines of the top account reduces the risk of higher concentration but however, this does not mean a proper diversification of revenue streams for the company.
Overall the company has good fundamentals and has delivered consistent growth with improving profitability.
The future outlook is also stable once the covid 19 situation clears the revenue growth will see some slow down in the coming years which will impact the margins but this is however temporary and the company still remains a good investment for the long term.
Therefore this category gets four stars in mind tree fundamental analysis.

Shareholding Pattern

If you look at the shareholding pattern.
Its promoter has 61.02% stake in the company.
Foreign institutions hold a 13.66% stake.
Domestic institutions hold 11.99%.
General public holds a 13.33% stake.

Strengths and Limitations

Strengths and Limitations are as follows:

Strengths

The Company is Virtually Debt Free.
The company has delivered average Profit Growth of 24.90% in last 3 years.
PEG ratio is 0.72%.
The company has effective cash conversion ratio of 179.71.
Company has sound operating leverage of 9.63 times.

Limitations

Looks like the company does not have any serious limitations.

Valuation

The company traded at a higher valuation since the 2013 period due to the bull rally in the Indian IT sector.
however, the effect on Mindtree was not long-term due to its focus was on the USA market.
The stock has seen a sharp correction in multiples in 2019 as it has undergone a hostile takeover.
The company also has 16.2 percent of the revenue coming from the travel and hospitality sector which is severely affected due to the covid-19 crisis.
Hence it can undergo further correction in the near future therefore this category gets three stars in fundamental analysis of mindtree.

Note: The overall rating is arrived at by taking the average of the above 10 category ratings and round it up if it is above 0.5 and rounded down if it is below 0.5. The overall fundamental rating mind tree shares 4.1 5. therefore it is a four-star stock.

Conclusion

Overall if we conclude Mindtree has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.

It is currently available at a fair valuation. What is your take on Mindtree have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.

For more trading ideas do follow us on:

Fundamental Analysis of Mindtree Ltd | Future Growth Stock

Introduction