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Mindtree Consulting – IPO Recommendation

February 11, 2007

Background:
MindTree founders are former Sr Executives @ Wipro Ltd who reported to Azim Premji. They founded the company in 1999 and since then it has grown at a very healthy CAGR of 46.9%. Revenue mix of MindTree is similar to that of HCL-Tech, 75% IT related and 25% from R&D engineering. US accounts for 61% of its revenue followed by Europe at 22.6% and the balance from Asia Pacific including India. Like any other IT consulting company from the Indian valley, MidTree also has a lot of fortune 500 companies.

Top 5 clients accounted for 37% of its revenues while the top 10 clients contributed 51% of its revenues. Attrition rate is a key challenge for mid sized companies such as MindTree.

Financials:
The company’s bottomline growth has been very healthy and if Mr Ashok Soota and his team are ambitious, then they might make it to the league of Tech Mahindra the fastest growing Midcap IT company in India.

For Year ending March 2005 Income and PAT are – Rs 215 crore and Rs 16.88 crore
For Year ending March 2006 Income and PAT are – Rs 455 crore and Rs 54.2 crore
For Year ending March 2007* Income and PAT are – Rs 600 crore and Rs 104 crore
* [DalalStreet.Biz estimates ]

The IPO Offer:
Offer Price – Rs 365 and Rs 425
Fully Diluted Equity Post IPO – Rs 37.288 crore
IPO Size – 55.93 Lakh shares * Rs 425 = Rs 237.7 crore
Retail IPO Size – Rs 71 crore.
Expected EPS for Year ending March31st 2007 on fully diluted equity Rs 27.89.

At Rs 425, the IPO is moderately priced at 15 times its earnings. Since the size of retail portion is mere 71 crore, it will be heavily oversubscribed. Allotment of retail application of Rs1 Lakh will also go in lottery. Investors can blindly subscribe to the issue.

Post IPO Scenario:
I normally don’t write future, but I am extremely positive about this company. MindTree will deliver higher growth rates but may not be as High as Tech Mahindra. So investors who don’t get allotted may also BUY the stock on listing upto Rs 600.

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