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Mindtree Consulting will underperform – HSBC

May 23, 2007

Its not just the dolalr that is addign to the wos of Mindtree consulting, but mere profit growth of 30% as a mdicap IT counter. HSBC analyst says it is overvalued and has the possiblity to deliver NEGATIVE returns. HSBC has set a Target Price of Rs 715 on the stock.

HSBC expects FY08e revenues at INR7.8bn (+32% y-o-y) and profits of INR1.2bn (+30% y-o-y). MT should continue to benefit from margin leverage as it gains scale. It had cash of USD64m, was FCF positive with a ROAE of 32% in FY07.

Given its strong performance (+85% since listing), HSBC expects the stock to give muted returns in the near term despite strong EBITDA growth. One-off events such as ESOP (employee share option plan) dilution and higher taxes are likely to impact FY08 earnings growth.

Trades at a 10-50% premium to the top five offshore vendors. Valuation premium to large vendors should correct over the next 12 months, though we expect MindTree to continue trading at a premium to peers. HSBC target price of INR715 is based on a 10% premium to fair
value of 16x FY09e earnings.

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